Tax clawback opportunity for high earners

High earners still have an opportunity to claw back unclaimed tax relief on personal pension contributions amounting to tens of thousands of pounds, even though the deadline for submitting self-assessment tax returns passed on January 31sup>st/sup>.

Speculation is growing that the government will limit pension tax relief to the basic rate of 20% in the March budget, and advisors are flagging a little publicized 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% or the top rate of 50% on contributions made in subsequent years.

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

However, advisors have calculated that a 50% 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% tax payer could have up to £10,000 unclaimed.

Steve Latto, head of pensions at Alliance Trust Savings said; “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.  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 2012. This rule will therefore allow a higher earner to submit a claim for pension tax relief that was omitted from a tax return.

Meanwhile, new figures released last 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.

Asset managers Fidelity calculated that restricting relief to 20% would cost higher rate taxpayers £56,000 over 20 years of saving, which at today’s rates would equate to an annuity of almost £3,000 per year for a couple retiring at age 65 or £3,500 for a man retiring at 65, every year for life.

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