A BBC personal finance expert has highlighted a crucial HMRC perk that could see UK households reclaim significant sums from overpaid taxes on pension withdrawals. Laura Pomfret, appearing on BBC Morning Live, described the process as feeling like "free money" and urged viewers to check their eligibility for back payments and refunds.
The 'Free Money' Concept Explained
Pomfret explained to hosts Gethin Jones and Michelle Ackerley that many people remain unaware of the tax relief available on pension contributions. "When we earn an income, we pay income tax," she said. "But if we decide to put some of that income into a pension, the government rewards us by giving our tax back. This incentive exists because the government wants us to save and invest for our retirement."
Understanding Your Pension Type
The expert outlined two main pension types that determine how tax relief is applied:
Net Pay Pensions: "This is where you get your relief before income tax is applied," Pomfret explained. "In this scenario, you've already received the relief automatically and don't need to take any action."
Relief at Source Pensions: "With this type, you pay into your pension after your net pay. You've already paid tax on your income to HMRC through your payslip, then you contribute to your pension separately."
The Basic Rate Calculation
Pomfret provided a clear example of how the relief works: "Let's say you put £80 into your pension. The pension provider goes to the government and requests the 20% basic rate tax relief. You then receive £20 back, meaning you've effectively contributed £100 to your pension for an £80 outlay. That's where the 'free money' concept comes from."
Higher Rate Taxpayers Beware
The expert issued an important warning for higher earners: "The pension provider only ever claims the basic 20% rate automatically. If you're a higher rate taxpayer paying 40% or 45% in England, Wales, or Northern Ireland, you could be missing out on that additional 20% or 25% relief. Scotland has different rates: 21%, 42%, 45%, or 48%. It's up to you to claim the extra amount."
Pomfret shared her personal experience: "This can catch people out, especially if you're on the cusp of higher tax bands or simply haven't been informed. I myself went through this process."
Checking Your Position
The finance expert advised viewers to take specific steps:
- Identify your pension type: "Check with your employer or pension provider to determine whether you have a net pay or relief at source pension."
- Assess your earnings: "Determine if you're tipping into higher tax brackets. Various forms of income can nudge you into the next tax bracket."
- Review contributions: "Log into your pension provider's online portal and check if only 20% is being added. If so, you might be entitled to additional relief."
Claiming Back Previous Years
Pomfret revealed a particularly valuable aspect of the scheme: "Crucially, you can often claim for previous tax years. HMRC typically allows you to go back four years after the end of the relevant tax year. Doing a little digging and paperwork could result in recovering substantial amounts of tax."
Taking Action
The expert emphasised that this relief isn't usually sorted automatically. "You have to take initiative," she said. "While it may seem frustrating to navigate, it's worth investigating for yourself or helping someone in your life who might benefit. There could be significant money left on the table that's essentially free money waiting to be claimed."
Pomfret concluded with practical advice: "Keep accurate records of your contributions and tax payments, as these amounts are essential for calculating your potential refund. This knowledge could make a substantial difference to your retirement savings and current financial situation."
