Hundreds of thousands of individuals paying higher rates of tax are failing to reclaim all pension tax relief available from HM Revenue and Customs (HMRC), leading to an estimated annual shortfall of around £250 million.
This issue has grown more significant as the freezing of income tax thresholds has pushed increasing numbers of savers into the 40 and 45 per cent tax bands. As a result, experts are urging pension savers and recent entrants to higher tax brackets to check their eligibility and reclaim any unclaimed benefits.
Higher Tax Bands See Spike in Missed Pension Relief
Recent data shows a sharp rise in the number of taxpayers falling into the higher and additional tax bands. Since the 2022/23 tax year, approximately two million more people have become higher-rate taxpayers, while an additional 660,000 have entered the highest band.
Despite the increased eligibility, up to a third of those paying the 40 per cent tax rate are not claiming the extra pension tax relief due to them, according to studies from leading financial services firms.
Frozen Allowances Increase Numbers in Higher Tax Brackets
The government’s decision to freeze personal tax allowances and thresholds has contributed to a significant number of workers being moved into higher bands, a trend described as “fiscal drag” by economists.
Those impacted are often unaware that they need to take action to claim the full pension tax relief, especially if their recent salary increases have pushed them into higher tax territory.
Why Tax Relief Goes Unclaimed by Higher Rate Taxpayers
UK private pension savers automatically receive 20 per cent tax relief on their contributions through “relief at source” schemes. However, those taxed at the 40 per cent or 45 per cent rates must submit claims for the additional 20 or 25 per cent relief themselves.
Gary Smith, a senior partner in financial planning and retirement advice at Evelyn Partners, said: “Pension tax relief is the most significant benefit in the private pension system, but many newly higher-rate taxpayers do not realise they must actively reclaim what is owed to them.”
Mr. Smith warned that failing to claim this relief could mean thousands of pounds lost, especially during a period where millions have entered higher tax brackets due to threshold freezes.
Pension Scheme Types Affect Relief Process
Tax relief processes vary depending on the pension scheme. Basic rate relief is added automatically in “relief at source” arrangements. In contrast, “net pay” or salary sacrifice arrangements provide relief at an individual’s full marginal rate, with no further action needed by the taxpayer.
Analysts recommend that employees seek clarification from their employer or scheme provider regarding their pension type to ensure all due tax relief is received.
HMRC’s own guidance confirms the need for individuals in personal pensions, including Self-Invested Personal Pensions (SIPPs), to actively reclaim higher and additional rate relief. This often requires submitting a self-assessment tax return or contacting HMRC directly.
New HMRC Evidence Requirements for Claims
Since 1 September 2025, HMRC has introduced stricter documentation requirements for all pension tax relief claims, regardless of the contribution amount.
Previously, supporting evidence was only needed for annual contributions above £10,000. Now, claimants must provide detailed documentation, typically available from pension providers, who increasingly offer online access to these documents.
Final Summary
With frozen tax thresholds pulling more individuals into higher tax bands, the risk of missing out on substantial pension tax reliefs has grown. Hundreds of thousands stand to lose significant sums unless action is taken to review pension arrangements and claim higher or additional rate relief where eligible.
Tighter HMRC rules from September 2025 mean up-to-date documentation is now required for every claim. Savers are advised to check their pension scheme type, contact providers, and ensure all entitlements are reclaimed through the proper channels, whether via self-assessment or direct correspondence with HMRC.
As the tax landscape continues to evolve, actively managing pension tax relief remains a crucial step for anyone affected by fiscal drag or recent changes to personal finances. For tailored tax reminders and planning support, many are turning to digital tools such as the Pie app to keep on top of these important deadlines.
