HMRC 'reaching out' to millions as workers could miss out on pension boost - what you need to know

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The tax authority is letting individuals know about the net pay pension anomaly affecting lower-paid workers

HM Revenue and Customs (HMRC) is urging Britons millions of Britons to check their eligibility for a little-known pension perk.

The tax authority is letting individuals know about the so-called net pay anomaly affecting lower-paid workers.

Millions of higher-rate taxpayers enrolled in "relief at source" workplace pension schemes could be forfeiting hundreds or even thousands of pounds by failing to claim additional tax relief they are entitled to.

The issue stems from the fact that these schemes only automatically apply basic-rate tax relief at 20 per cent, leaving those who pay tax at 40 per cent or above to reclaim the difference directly from HMRC.

Many savers wrongly believe the process is handled entirely by their employer or pension provider. Nest, the country's biggest workplace pension provider, runs a relief at source scheme covering 13 million members, many of whom may be affected.

Pensions function as a tax deferral mechanism, shielding contributions from income tax at the point they are made and protecting assets from both income tax and capital gains tax while they remain invested.

Upon retirement, savers can access up to a quarter of their pot free of tax, with remaining withdrawals taxed at their marginal rate.

In a net pay arrangement, contributions are deducted from salary before any income tax is calculated, meaning relief is automatically applied at the correct rate.

A higher-rate taxpayer receives 40 per cent relief without lifting a finger. Contributions come from post-tax earnings, and the pension provider reclaims only 20 per cent basic-rate relief from HMRC to top up the pot.

For anyone paying tax above the basic rate, this leaves a gap that must be actively pursued. Consider a worker earning £60,000 who puts £1,000 into a relief-at-source pension.

Their provider claims the standard 20 per cent top-up from HMRC, meaning only £800 leaves their pay packet while £1,000 lands in the pot.

However, that individual has already been taxed at the higher rate on that slice of income, entitling them to a further £200 back. Someone in this position who has never submitted a claim could be sitting on four years' worth of backdated relief.

Nest pensions, the UK's largest workplace scheme with 13 million members, operates on a relief-at-source basis. Many of those savers earning above the higher-rate threshold may be unwittingly short-changing themselves.

Charlene Young, head of technical at AJ Bell, said: “HMRC is finally reaching out to lower earners to correct the net pay anomaly and there has, understandably, been a lot of focus on ensuring the lowest paid aren’t missing out on crucial pension tax perks.

"But they are not the only pension savers who risk being short-changed if they mistakenly assume pension tax incentives are taken care of automatically. Higher earners may need to claim tax relief too and could be missing out on thousands if they don't.

"Most employees will be saving into a pension by default thanks to auto-enrolment, with many people assuming that they're getting the full tax relief they're entitled to and that this is all handled by their pension provider, or their employer."