Stop Chucking Money Away

Roger Federer X tax relief on pension contributions

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Last summer, you may have seen a video of Roger Federer giving a commencement speech at Dartmouth College which went viral.

Be aware, it is quite American.

This is a bloke who won 80% of his matches during his career, as well as 20 grand slam tournaments. He is undoubtedly one of the all time great tennis players.

And yet, during this speech he highlights an unbelievable statistic. Over the course of his career, he won just over 54% of the individual points he played. This seems remarkably low for someone with such a storied CV.

But this is the nature of tennis. All time, there are only three players who have had an individual point win percentage over 54% - Federer, Rafa Nadal and Novak Djokovic.

Even the best in the world at tennis lose points regularly. This being the case, the game becomes about two things - learning to move on from disappointment quickly and trying to minimise errors.

For us mere mortals the latter really is crucial. The inexperienced tennis player (hi) will see every shot as an opportunity to wallop a spectacular winner. In all likelihood this strategy will lead to defeat via a litany of mistakes.

No, the better strategy is to avoid giving away cheap points. Play high percentage shots, and maintain a laser focus on minimising unforced error.

Which, of course, brings us neatly onto the topic of claiming tax relief on pension contributions.

One of the appeals of contributing to a pension, particularly for high earners, is that you will receive tax relief on the contribution.

Mechanically, this happens in one of two ways depending on the type of pension scheme we are dealing with.

Either the money is paid into your pension before tax is deducted. Therefore, you do not need to do anything further to claim any tax relief, as tax was never deducted in the first place.

This kind of pension is referred to as a “net pay arrangement”. Most workplace pensions are of this ilk.

But some workplace pensions, and all personal pensions, are different. They are called “relief at source” schemes.

Any money you choose¹ to pay into this second kind of pension is paid after tax has been deducted. The pension administrator then automatically claims basic rate tax relief (25% of your contribution) on your behalf automatically.

This is perfectly fine if you are either a non-taxpayer, or a basic rate taxpayer. There is nothing more for you to do.

However, if you are a higher or additional rate taxpayer - you must then claim the further tax relief to which you are entitled through your annual self-assessment to HMRC.

As it turns out, a lot of people forget to do this. Between the 2016/17 and 2020/21 tax years, higher-rate and additional-rate taxpayers in the UK left approximately £1.3 billion in pension tax relief unclaimed. Double fault, hard luck.

Source: The Money Den

If you’ve been paying attention, a few questions will probably spring to mind at this point.

1. Why would any employer choose a relief at source scheme when it means more work for their employees?

Fair question. The simple answer is that these relief at source workplace schemes are not designed for companies where a significant proportion of the staff are higher rate taxpayers or above.

For companies that predominantly employ casual staff, think your first job out of school, these pensions are great.

For individuals who pay no income tax, they are actually better off with a relief at source scheme as the pension administrator will automatically claim basic rate relief on their behalf.

2. Which pension schemes are relief at source, and which are net pay?

As I mentioned above, all individual personal pensions are relief at source. The water becomes somewhat murkier when we turn to workplace pensions, as some are net pay and some are relief at source.

Per the Pension’s Regulator, below is a (potentially uncomprehensive) list of relief at source workplace schemes.

• NEST

• The People’s Pension

• Collegia Pension

• True Potential Investments

• Standard Life²

• Penfold Auto Enrolment Workplace Pension Scheme

3. Bugger, I am a member of one of these schemes and didn’t realise I needed to claim additional relief. How do I go about doing this?

Very easily done, and very common. You can’t know what you don’t know.

For contributions made during the current tax year - you just need to remember to claim relief through the Self Assessment process.

If you have made contributions in past years and forgotten to claim tax relief, you can write to HMRC and ask for your money back. You can only (officially) claim for up to the past four tax years. That is the bad news.

The good news is that the process to claim any past relief you are entitled to has recently become a heck of a lot easier - you can now do this online. Which means more time for tennis I guess.

Have a great weekend.

None of the above should be taken to represent formal tax advice, nor is this advice to any specific individual. If you have questions regarding your position, please contact a regulated financial adviser.

1. Please note that this only applies to contributions you choose to make personally, employer contributions are not relevant here.

2. Again, per the Pensions Regulator - large employers may be using the trust based scheme, which is a Net Pay Arrangement (the Group Personal Pension (GPP) uses Relief At Source).