Authorities figures present the variety of higher-rate revenue taxpayers has risen sharply
6.3 million individuals at the moment are paying higher-rate tax (Picture: Getty)
Hundreds of thousands with personal pensions face a last-minute scramble to keep away from dropping out on a whole lot – and even hundreds – of kilos in tax reduction.
With January 31 marking the cut-off for submitting tax returns, consultants warn {that a} surge in higher-rate taxpayers has left many pension savers overpaying tax just because they’re unaware they have to actively declare the cash again.
Authorities figures present the variety of higher-rate revenue taxpayers has risen sharply as frozen tax thresholds drag extra earners into the 40% band – a course of often known as fiscal drag.
In keeping with official information cited by Scottish Widows, there was a 42.6% enhance in higher-rate taxpayers between 2021 and 2024, with an estimated 310,000 additional individuals pushed into the upper band within the 2024/25 tax yr alone.
Meaning round 6.3 million individuals at the moment are paying higher-rate tax – lots of whom are lacking out on pension tax reduction they’re legally entitled to.
Robert Cochran, Retirement Skilled at Scottish Widows, stated the size of the issue is being underestimated.
He stated: “In keeping with the Authorities’s personal figures, there was a 42.6% enhance in higher-rate revenue tax payers between 2021 and 2024 because of the freezing of tax thresholds – an estimated additional 310,000 individuals simply within the 24/25 tax yr and a whopping 6.3 million people who at the moment are paying the upper tax charge – lots of that are heading in the right direction to overpay tax just because they don’t know the principles.”
The problem impacts individuals who pay into personal or office pensions underneath ‘reduction at supply’, the place basic-rate tax reduction is added routinely – however higher-rate reduction have to be claimed individually from HMRC.
Mr Cochran stated the sums concerned might be important, including: “To place this into context, a £5,000 pension contribution might imply an additional £1,000–£1,250 in tax reduction again in your pocket, however provided that you declare it.”
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Increased-rate taxpayers are entitled to 40% tax reduction on pension contributions, whereas additional-rate taxpayers can declare 45%. Nonetheless, solely 20% is utilized routinely.
The remaining reduction have to be claimed both by a self-assessment tax return or by contacting HMRC immediately.
Crucially, savers can backdate claims for as much as 4 tax years, doubtlessly unlocking a considerable windfall.
“The excellent news is you’ll be able to return and declare all of your lacking tax reduction over the past 4 years,” Mr Cochran added.
“Should you assume you is likely to be on this bracket, chances are you’ll have to do a self-assessment tax return by the January 31 to get the tax reduction you’re entitled to in your pension contributions.”
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HMRC has repeatedly warned that anybody who misses the January 31 deadline dangers penalties and curiosity – and pension consultants say failing to behave in time might imply dropping out on reduction for an additional yr.
“Failure to file a return or contact HMRC to advise your pension contributions means you’ll lose out on this cash,” Mr Cochran stated.
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