6.3 million people are now paying higher-rate tax (Image: Getty)
Millions with private pensions face a last-minute scramble to avoid losing out on hundreds – or even thousands – of pounds in tax relief.
With January 31 marking the cut-off for filing tax returns, experts warn that a surge in higher-rate taxpayers has left many pension savers overpaying tax simply because they are unaware they must actively claim the money back.
Government figures show the number of higher-rate income taxpayers has risen sharply as frozen tax thresholds drag more earners into the 40% band – a process known as fiscal drag.
According to official data cited by Scottish Widows, there has been a 42.6% increase in higher-rate taxpayers between 2021 and 2024, with an estimated 310,000 extra people pushed into the higher band in the 2024/25 tax year alone.
That means around 6.3 million people are now paying higher-rate tax – many of whom are missing out on pension tax relief they are legally entitled to.
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Robert Cochran, Retirement Expert at Scottish Widows, said the scale of the problem is being underestimated.
He said: “According to the Government’s own figures, there has been a 42.6% increase in higher-rate income tax payers between 2021 and 2024 due to the freezing of tax thresholds – an estimated extra 310,000 people just in the 24/25 tax year and a whopping 6.3 million people that are now paying the higher tax rate – many of which are on course to overpay tax simply because they don’t know the rules.”
The issue affects people who pay into private or workplace pensions under ‘relief at source’, where basic-rate tax relief is added automatically – but higher-rate relief must be claimed separately from HMRC.
Mr Cochran said the sums involved can be significant, adding: “To put this into context, a £5,000 pension contribution could mean an extra £1,000–£1,250 in tax relief back in your pocket, but only if you claim it.”
Higher-rate taxpayers are entitled to 40% tax relief on pension contributions, while additional-rate taxpayers can claim 45%. However, only 20% is applied automatically.
The remaining relief must be claimed either through a self-assessment tax return or by contacting HMRC directly.
Crucially, savers can backdate claims for up to four tax years, potentially unlocking a substantial windfall.
“The good news is you can go back and claim all your missing tax relief over the last 4 years,” Mr Cochran added.
“If you think you might be in this bracket, you may need to do a self-assessment tax return by the January 31 to get the tax relief you are entitled to on your pension contributions.”
HMRC has repeatedly warned that anyone who misses the January 31 deadline risks penalties and interest – and pension experts say failing to act in time could mean losing out on relief for another year.
“Failure to file a return or contact HMRC to advise your pension contributions means you will lose out on this money,” Mr Cochran said.