Only relevant to those in a relief at source scheme

When you earn money and use it to pay into a pension, you get what is called ‘tax relief’. This means that instead of paying tax on these earnings, you get the tax given back to you.

There are two types of tax relief - net pay and relief at source.

In a net pay scheme, contributions are deducted from the employee’s gross salary (i.e. before tax has been deducted). The employee then pays tax only on salary “net” of (i.e. after deducting) the contributions. This means that the employee automatically receives tax relief at his or her highest rate of income tax.

In a relief at source scheme, contributions are deducted from the employee’s net salary (i.e. after tax has been deducted). However, the employer deducts only 80% of the total pension contribution from the employee’s salary; the scheme then adds an amount equal to basic rate tax relief, which it then reclaims from HMRC.

Not relevant here, but interesting to note, that the scheme adds this top-up to the employee’s contribution whether or not the employee is earning enough to pay tax in the first place.

For any higher rate tax paying earners that are in a relief at source scheme, they will need to complete a self assessment tax return to claim the additional 20% tax relief that is not automatically applied.

What kind of scheme am I in?

At the time of writing, we are aware that Smart pension and Now Pension are net pay arrangements whereas Nest is relief at Source. Most providers allow both types to be set up so it's best to check your own payslip and pension account to see which arrangement you have.

What’s this worth to me anyway?

The average value of unclaimed tax relief for higher earners in 2020/2021 was £425. For additional rate tax payers it was £527 (Private pension statistics commentary: September 2023).

How salary sacrifice can help

Here’s how going into salary exchange can help: when you go into salary exchange, you automatically move to a net pay arrangement. This means that you no longer have to complete a tax return to get your full tax relief.

How to claim back your tax

If you have been in a relief at source arrangement and unaware of the need to claim back your higher rate tax, you can submit a claim for up to the last 4 years of tax paid.

You can do this in two ways: through your self-assessment or by contacting HMRC directly.

To claim through your self-assessment, you will need to do so online.

You should go to the relevant section of the online form and state the exact amount of your pension contributions. This should be a gross calculation that includes your contributions and the basic rate tax relief of 20%.

For example, if you are paying £80 into your pension and getting a £20 contribution from the government, you would put your total contribution as £100.

Your relief will either be supplied as a rebate at the end of the year, a reduction in your tax liability or a change to your tax code.

You can also write to your HMRC tax office. You will be able to find the relevant address on your P60 or payslip, and the letter should outline exactly how much you have paid.