Experts are urging workers to take advantage of pension tax relief as an “eye-watering” amount in savings is being made.
Last year, pension tax relief saved Britons around £25.4billion, a rise from £5.5billion over the last five years.
For the 2023-24 tax year, this figure is forecast to reach £27.7billion following changes to the annual allowance and the abolition of the lifetime allowance.
Tax relief on National Insurance contributions to registered pension schemes saved workers £25.9billion in 2022/23 which is a rise of £8.6billion increase over the last half a decade.
Employees are being reminded they can save money from their paychecks by using this relief.
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Pension tax relief comes in one of two forms which is either “relief at the source” or through net pay.
The former is when employers take away tax from someone’s salary and then deduct their pension contribution from after-tax pay, which is sent to their pension provider.
In comparison, net pay is taken before someone is taxed so they end up paying less to HMRC and get the relief immediately.
It should be noted that pension providers claim the basic 20 percent rate of tax relief from the government before putting it into their pension and those with a higher or additional rate taxpayer, will have to get extra tax relief from HMRC.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, broke down why tax relief figures have skyrocketed as of late.
She explained: “The amount pensions save us in tax continues to soar, hitting an eye-watering £51.3billion in 2022-23 – up more than £14billion over the past five years.
“Much of this is down to the success of auto-enrolment which has brought over 10m people into pensions, as well as wage growth pushing up pension contributions.
“These figures throw into sharp relief the enormous impact tax reliefs can have on how much people end up with in retirement.”
The tax expert warned that the public is at risk of “missing out” if they fail to get this tax relief for themselves.
Ms Morrisey added: “Pension tax relief is a real hidden hero of pensions. A basic rate taxpayer contributing £80 will have it boosted up to £100 by tax relief. A higher-rate taxpayer needs to contribute just £60 to get the same boost to £100.
“However, relatively few people understand what tax relief is or the impact it can have.
“As we come up to self-assessment deadlines, it is an important reminder for higher and additional rate taxpayers to check to see if they are claiming their higher rate relief on their tax returns or else they risk missing out.”
