HMRC warning: Pension savers risk losing thousands in tax relief under new crackdown

New regulations from HM Revenue and Customs are creating additional hurdles for taxpayers seeking to reclaim pension tax relief, with the changes potentially leaving savers thousands of pounds out of pocket.

Since September 1, all individuals claiming higher or additional rate tax relief must provide documentation from their pension providers, regardless of contribution amounts. Previously, only those contributing more than £10,000 annually faced this requirement.

Charlene Young, senior pension and savings expert at AJ Bell said: "Pension tax relief is a complex area where mistakes are possible. HMRC is clamping down by insisting that everyone get hold of evidence for their claim, no matter how small the amount of tax relief they're requesting."

The stricter rules affect taxpayers who pay more than the basic 20 per cent income tax rate and contribute to specific pension arrangements where full relief isn't automatically applied.

The distinction between pension scheme types determines whether taxpayers must actively pursue their full entitlements.

With net pay arrangements, contributions are deducted before income tax calculations, ensuring automatic relief at an individual's marginal rate - whether that's 20 per cent, 40 per cent or 45 per cent.

However, relief at source schemes operate differently. These deduct contributions from already-taxed earnings, with HMRC subsequently adding only basic rate relief of 20 per cent. Higher and additional rate taxpayers must then claim the remaining 20 per cent or 25 per cent themselves.

"Many people probably assume that they're getting the full tax relief they're entitled to on their pension and that this is all handled by the pension providers or their employer," Ms Young explained. "While that's the case for a lot of people, it isn't true for everyone."

The distinction particularly matters for those contributing to self-invested personal pensions (SIPPs) or whose employers use relief at source arrangements.

The claiming procedure involves several steps, beginning with examining payslips to identify scheme types and contribution details. Those unable to determine their arrangement should contact employers or pension providers directly.

Claims can be submitted through self-assessment tax returns, online government portals, or written correspondence.

The online process requires Government Gateway access and documentation including payslips, P60 forms, or pension contribution records from providers.

"This is going to be a pain for some higher and additional rate taxpayers who are used to claiming already and who will now need to do some extra legwork," Ms Young noted.

The impact extends significantly to Nest pension members, as the UK's largest workplace pension provider operates exclusively through relief at source arrangements for its 13 million participants.

These savers must actively claim any relief beyond the basic rate, making the new evidence requirements particularly burdensome for this substantial group.

The freeze on tax thresholds combined with wage growth has dramatically expanded the number of higher-rate taxpayers in recent years. Data from HMRC shows higher-rate taxpayers increased from 5.1 million in 2022-23 to a projected 7.08 million by 2025-26, while additional-rate taxpayers are expected to more than double from 570,000 to 1.23 million over the same period.

"It's particularly important for those people paying 40 per cent tax for the first time to take note. That's because they may only be receiving 20 per cent tax relief the basic rate and are entitled to claim an additional 20 per cent on top," Ms Young warned.

These newly elevated taxpayers face a double burden - paying increased income tax due to threshold freezes while potentially missing out on their full pension relief entitlements.

"Claiming what you're owed could land you a rebate worth hundreds, or even thousands of pounds, from the taxman," Ms Young added.