Those caught in the £100,000 tax trap risk losing out on more than a quarter of a million pounds in pension tax relief - as well as valuable childcare support* - according to new analysis from Rathbones, one of the UK’s leading wealth and asset management groups.
While 20% basic rate tax relief is automatically applied to pension contributions made into private pensions – commonly a Self-Invested Personal Pension (SIPP) – higher rate taxpayers are entitled to reclaim an additional 20% through their self-assessment tax return. Additional rate taxpayers can reclaim a further 25%.
For anyone earning between £100,000 and £125,140, a marginal income tax rate of 60% applies due to the tapering of the personal allowance. This means they can claim an additional 40% tax relief on top of the 20% already received at source.
Based on a £10,000 pension contribution, failing to reclaim the extra relief results in the following losses for those in the 60% marginal tax band:
£5,000 in a single tax year
£89,666 over 10 years
£255,358 over 20 years
These figures assume the extra tax relief is reinvested in a pension achieving 5% annual growth (net of fees), with contributions increasing by 2% per year in line with the inflation target.
If investment returns were higher – at 7% net of fees – the lost pension wealth would rise to £100,066 over 10 years and £318,825 over 20 years.
Ed Wood, Senior Financial Planner at Rathbones, says: “Earning just above £100,000 puts people in one of the most punitive tax positions in the UK – but it also creates an opportunity. By giving up a small slice of heavily taxed income, individuals can not only stay eligible for important childcare support but also supercharge their retirement savings. The numbers speak for themselves – a modest sacrifice today can snowball into a sizeable sum tomorrow thanks to investment growth and compounding.
“While earnings and income thresholds may shift over time, the principle remains unchanged: a penny saved today can compound into a pretty penny tomorrow."
Claiming additional tax relief on contributions to private pensions can bolster retirement savings in a similar fashion:
A higher rate taxpayer making a £10,000 pension contribution and reclaiming the extra relief could boost their pension pot by £2,500 in a year, rising to £44,833 over 10 years and £127,679 over 20 years.An additional rate taxpayer making the same contribution could boost their pot by £3,125, rising to £56,041 over 10 years and £159,599 over 20 years.
These figures also assume the extra tax relief is reinvested in a pension achieving 5% annual growth (net of fees), with contributions increasing by 2% per year in line with the inflation target.
Ed Wood adds: “If you’ve missed out on claiming pension tax relief in previous years, there’s some good news. HMRC allows you to back claim for up to four tax years – which, for someone in the 60% band, could mean a refund of around £20,000. That’s a significant amount of money to leave unclaimed. HMRC has also streamlined the process, making it easier to recover what you’re owed.
“It’s also worth remembering that the same principle applies to Gift Aid. Even if you haven’t made large charitable donations, you may have sponsored friends, colleagues or family members over the years. If the Gift Aid box was ticked, higher rate and additional rate taxpayers can reclaim extra relief on those contributions too. Many fundraising platforms keep a record of past donations, which can be invaluable when working out what you’re entitled to. It’s a simple step that can make a meaningful difference to your finances.
“With the self-assessment deadline approaching, now is the time to review whether you’ve claimed everything you’re entitled to.”
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