Tax clawback opportunity for higher earners

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Higher earners still have an opportunity to claw back unclaimed tax relief on personal pension contributions – which could amount to tens of thousands of pounds – even though the deadline for submitting self-assessment tax returns passed on January 31.

With speculation growing that the government will limit pension tax relief to the basic rate of 20 per cent in the March Budget, advisers are flagging a little-publicised rule which allows individuals to receive any tax relief which hadn’t been claimed in the previous four years.

Pension providers have warned that complex “anti-forestalling” measures introduced in 2009, in order to limit tax relief for high earners, may have caused confusion over whether it is possible to claim back relief at the higher rate of 40 per cent or the top rate of 50 per cent, on contributions made in subsequent years.

Those anti-forestalling measures, which have since been removed, restricted tax relief to the basic rate of 20 per cent on irregular lump-sum contributions made by those earning £130,000 a year or more.

However, advisers have calculated that a 50 per cent taxpayer not affected by the rules could be missing out on up to £15,000 in unclaimed tax relief, based on the maximum allowable contribution of £50,000 in a year. Similarly, a 40 per cent taxpayer could have up to £10,000 unclaimed.

“With numerous changes to the rules that have governed how much individuals can contribute to their pension in recent years, it is possible that many higher-rate taxpayers have lost out on additional rate tax relief,” said Steve Latto, head of pensions at Alliance Trust Savings.

“The good news is that, despite missing the self-assessment deadline, individuals can claim back up to four years’ worth of tax relief on their pension contributions.”

According to HM Revenue & Customs, if a mistake has been made on a tax return, a claim can be made within four years of the end of the tax year in question.

For example, if too much tax was paid in 2007-08, a new claim must be made by April 5 2012. This rule will therefore allow a higher earner to submit a claim for pension tax relief that was omitted from a tax return.

“An individual’s pension scheme administrator will claim basic rate tax relief, but it is the individual’s responsibility to claim any additional tax relief,” explained Latto.

Meanwhile, new figures released this week showed that middle-income earners could be tens of thousands of pounds worse off if higher rate tax relief was removed on pension contributions.

Fidelity, the asset managers, calculated that restricting relief to 20 per cent would cost higher rate payers £56,000 over 20 years of saving.

“In today’s rates, that equates to an annuity of almost £3,000 per year for a couple retiring at age 65, or £3,500 for a male retiring at age 65 – every year for the rest of their life,” Fidelity noted.

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