Wealth managers have issued a stark warning to Britain's higher earners, revealing that a failure to act before the self-assessment tax return deadline could cost them a quarter of a million pounds in lost pension tax relief.
The Costly £100,000 Tax Trap
According to analysis from the wealth and asset management group Rathbones, individuals caught in the so-called £100,000 tax trap are at risk of letting thousands of pounds slip through their fingers. The issue is twofold: not only do they miss out on valuable pension tax rebates, but they also lose eligibility for free childcare support once household income crosses that threshold.
While basic 20 per cent tax relief is applied automatically to private pension contributions, higher and additional rate taxpayers must reclaim the extra relief they are owed via self-assessment. Higher rate taxpayers can reclaim an additional 20 per cent, while additional rate taxpayers can get a further 25 per cent back.
The situation becomes particularly punitive for those earning between £100,000 and £125,140, who face an effective marginal tax rate of 60 per cent due to the tapering away of the personal allowance. Ironically, being dragged over the £100,000 line also creates a significant pension planning opportunity, allowing for a claim of 40 per cent tax relief on top of the automatic 20 per cent.
Staggering Long-Term Losses Revealed
Rathbones has modelled the potential long-term impact of failing to reclaim this relief. Based on an annual pension contribution of £10,000, with assumed growth of five per cent and contributions rising with inflation, the losses for someone in the 60 per cent tax band are profound.
In a single tax year, £5,000 could be lost. This figure balloons to £89,666 after a decade. After 20 years, the total lost pension wealth surpasses £250,000. Should investment returns reach seven per cent, the forfeited sum could top £300,000 over the same period.
Act Now to Reclaim Past Relief
There is a crucial window for those who have missed out in previous years. HM Revenue & Customs (HMRC) allows back-claims for up to four tax years. For those in the 60 per cent band, this could mean a total refund in the region of £20,000.
Ed Wood, Senior Financial Planner at Rathbones, commented: "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."
He added, "The numbers speak for themselves. A modest sacrifice today can snowball into a sizeable sum tomorrow thanks to investment growth and compounding. With the self-assessment deadline approaching, now is the time to review whether you’ve claimed everything you’re entitled to."
The warning serves as a critical reminder for all higher and additional rate taxpayers to ensure their self-assessment returns are completed accurately and submitted before the deadline to secure their full financial entitlements.
