Top earners are overpaying thousands of pounds in tax because they weren’t made aware of a change to the way tax relief is given on their workplace pension contributions.
Tax advisers have reported cases of recovering four-figure sums for City professionals in the 40 per cent and 50 per cent tax bands, who were not told of new arrangements for claiming pensions tax relief when they were shifted out of a final-salary scheme.
Employee contributions to final-salary, or defined-benefit (DB), schemes are automatically deducted from gross pay – with tax only paid on what’s left. In this way, basic-, higher- and additional-rate taxpayers get full tax relief immediately.
However, with the demise of DB schemes, millions of employees have been shifted on to group personal pension plans (GPP), where higher-rate tax relief is not automatically credited.
In GPP plans, only basic-rate relief of 20 per cent is credited, with employees then responsible for claiming any additional higher-rate tax relief through their PAYE codes or their Self-Assessment tax returns.
The Pensions Regulator expects employees in these situations to be made aware of their new duties, but tax advisers say this is not always the case.
“As a firm we have seen many cases where employees have not been made aware of the change to how tax relief is accounted for, and so have been overpaying substantial sums in tax,” said Ian Wadhams, partner with Ingenhaag, a specialist taxation adviser. “We reclaimed higher-rate relief of £6,000 relief for one client. In the cases we have [seen], the employees were not told they needed to claim.”
There are no official estimates of how many employees may be under-claiming. But, according to the Office for National Statistics, there are 2.8m members of contract-based pension schemes – including group personal, group stakeholder and group self-invested plans.
“It is possible that many could be under-claiming,” said Raj Mody, tax partner with PricewaterhouseCoopers, the professional services group. “If you had gone to an adviser after opting not to shift to a GPP, they should have made you aware of how to claim tax relief in a personal pension. But those shifting into a GPP could have this important information slip through the net.”
Advisers say employees who are unsure of the type of pension scheme their employer operates should to ask their HR departments for details of the contributions they personally make, and the amount of tax relief received through the payroll.
“All employees should check their PAYE Coding Notices to see if there is an allowance for personal pension contributions,” said Wadhams. “This code can be amended so that higher rate relief is automatically deducted. If they have a tax adviser, employees should send their PAYE Coding Notices to them, as the Revenue stopped sending agent copies earlier in the year.”
HM Revenue & Customs will allow claims for higher-rate tax relief to be backdated four years.