The case of the missing pension tax relief

A ‘Supplementary forecast information release’ from the Office for Budget Responsibility (OBR) on ‘Costing of charging NICs on salary sacrificed pension contributions’ may sound like a cure for insomnia. It is certainly not short of acronyms beloved of pension nerds, such as OpRA, RAS and ASHE*. However, deep in the cocktail of jargon, economic modelling and behavioural analysis was an interesting assumption.

In working out the extra revenue that would flow to the government from changing the rules for salary sacrificed pension contributions from 2029, the OBR said “The costing assumes that 10 per cent of higher-rate and additional-rate relief from RAS schemes is unclaimed, which is lower than is assumed in the overall population …. This leads to a permanent increase in receipts, of an estimated £0.2 billion in 2030/31”.

You would be forgiven if you think this OBR-speak needs a little translation. Relief at source (RAS) schemes are pension schemes under which your personal contributions are made net of basic rate tax, regardless of your actual tax rate. For example, £100 of gross contribution involves making a net outlay of £80, with the £20 basic rate relief claimed by the pension provider. Personal pensions are RAS schemes, as are some workplace pension schemes, notably NEST, which has over 13 million members.

The RAS approach gives instant automatic basic rate tax relief – even to non-taxpayers – but if you pay tax at more than basic rate, you need to claim the extra relief due from HMRC. Using the same £100 gross contribution example, if you are a higher rate taxpayer, you would receive £20 basic rate relief immediately and claim the balance of your tax relief (£20, or £22 if you are a Scottish higher rate taxpayer) from HMRC, either by contacting them directly or via your self assessment return.

What the OBR is saying is that, in practice, more than one in ten people currently do not make that claim, to their personal disadvantage, but to the benefit of the Treasury. That could be for a variety of reasons, including the fact that a frozen higher rate tax threshold has dragged many former basic rate taxpayers into the higher rate club.

If you think you might be one of those unwittingly helping the Chancellor, a simple starting point is to check with your financial adviser.

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice. 

* OpRA = Optional Remuneration Arrangements; RAS = Relief At Source; ASHE = Annual Survey of Hours and Earnings