This is a rather well-kept secret that most people I talk to don’t know about.
When you pay into your pension as a UK tax payer, you receive a pension tax credit that corresponds to the tax rate you are on – if you pay 20% tax you get a 20% tax credit on your contributions, if you pay 40% tax your pension gets bumped up by 40% through your pension tax credits, and if you pay 50% tax you get 50% on top in tax credits.
But this doesn’t happen automatically!
If you are a higher rate tax payer (40% or 50%) you have to actively claim your higher rate tax credits!
Your employer claims only the initial 20% on your behalf (this is called ‘relief at source’), and if you don’t claim the difference to the higher rate – you lose itWhat does this mean?
It means your pension pot grows at a much slower rate and you will most likely have a smaller pension when you retire.
If you miss out on 20% or even 30% of your pension payments, you will lose out. And, like with all investments, compound interest means that if you start accumulating your pension slower, it will grow slower.
You will pay tax on your pension when you draw it, but in the meantime the taxman helps you grow your pension pot by adding tax credits correspondent to the tax rate you pay.
Talking to my friends I realised most of them, like me, were not aware of it either, even some friends working in the financial sector.
The good news
You can claim the difference going back up to 3 tax years.
If you don’t file a tax return all you need to do is call up HMRC and they should do it in a few minutes. You can also write per post. This is how to contact them.
However if you failed to claim back the difference in your tax return, do not panic. You can write a letter to the taxman (call them and they will tell you what to write). They will ask to see your itemized pension statement(s) for the last 3 tax years, and you should get you back credits in approx. 6-8 weeks.
Whatever your case is – it’s worth it!
Have you changed employer and pension provider in the past? Here I write about how you can consolidate your old pension pots effortlessly and for free with PensionBee. Sign up for a PensionBee through this link and you’ll get £50 pounds straight into your account.
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