More than 800,000 higher earners a year are missing out on tax relief on their pension contributions.

As the self-assessment deadline passes, more than £1 billion of relief could have gone unclaimed, according to HM Revenue & Customs data obtained by the pensions consultancy LCP.

Savers who only have one job and recently started paying the higher rate were the most likely to be at risk, because they may have not realised that they need to voluntarily file a tax return to claim back the money.

Steve Webb, a former pensions minister who now works for LCP, said: “With more and more people being dragged into higher rates of income tax, it is important to claim all the tax relief they are entitled to.”

How it works

In the 2023-24 tax year almost seven million people paid into a pension from their net pay, after tax. Under this relief at source method, you automatically get tax relief at the basic 20 per cent rate. If you are a 40 per cent higher-rate taxpayer (earning more than £50,270) or 45 per cent additional-rate payer (with income above £125,140) you have to claim the rest of the relief back through a tax return.

If you pay into your pension through salary sacrifice, your gross salary is reduced by your employer to make pension contributions, saving you tax at your income tax rate and also national insurance. Higher and additional-rate taxpayers will therefore get their full tax relief.

Anyone paying £800 into their pension will get an extra £200 in their pot — the tax they would have paid on £1,000 of earnings. Higher and additional-rate taxpayers can claim the extra 20 per cent or 25 per cent back from HMRC.

HMRC pays this extra tax relief through an adjustment of your tax code (meaning you pay less tax next year) or into your bank account. It does not get paid into your pension pot like the basic-rate credit.

In her November budget the chancellor, Rachel Reeves, froze the income tax thresholds until 2031, which means more people will be dragged into higher tax bands as their salary increases, and more people will be eligible for the tax relief.

More than £1.4 billion unclaimed

In the 2023-24 tax year, nearly 17 per cent of taxpayers paid the higher rate, while 2.5 per cent paid the additional rate. About 6.8 million people save into a pension using relief at source.

Using these figures LCP estimated that about 1.1 million higher-rate and 170,000 additional-rate payers are entitled to tax relief on relief at source pensions. But the number of people claiming is much lower. LCP said only 316,000 higher-rate payers — 28 per cent — were claiming the extra tax relief. Higher-rate payers were more likely to claim, with an estimated 150,000 — 88 per cent — doing so.

The average higher-rate payer who claims tax relief on their pension in this way gets £1,756 a year, according to HMRC. This rises to £2,195 for the average additional-rate taxpayer.

LCP said if every higher-rate and additional-rate payer claimed the relief, it would cost the taxman an extra £1.46 billion.

Webb said this figure is also likely to be an underestimate. “This is because we have simply used the average pension contribution across all taxpayers shown on tax returns, whereas it is reasonable to suppose that higher earners make higher pension contributions.”

Claiming pension tax involves filling out a self-assessment tax return. Under the section on “tax relief”, you enter the total amount you have paid into your pension, including the 20 per cent extra tax relief you have already been given. You can also claim for up to four previous years.