Employee Pensions

 

The way that tax relief is given on employee pension payments depends upon what type of scheme it is. 

• If the scheme is a ‘net pay arrangement’, the total pension contribution is deducted from your pay before tax is calculated, therefore, full tax is given immediately on the full pension payment.

• If the scheme is a ‘relief at source’ arrangement, the pension contribution is deducted from the gross pay after tax has been calculated. The amount will be net of basic rate tax relief.

 

Further details of the two schemes is given below:

Net Pay Schemes

Net pay arrangements do not require the employee to do anything to get your tax relief. Employee pension contributions are deducted from the gross salary by the employer before income tax is calculated, so tax relief is given on the pension amount immediately at the highest rate of tax.

Relief at Source Schemes

Under relief at source schemes, employees pay pension contributions from their net pay that has already had tax deducted from it. The pension contribution is net of basic 20% tax relief. However, if they are higher rate taxpayers and, assuming they aren’t already completing self-assessment returns or making higher rate pension claims, then they need to make claims with HMRC for the additional 20% relief, giving them the tax relief up to the higher rate.

For example, if an employee is a higher rate taxpayer, and pays a £200 employee pension contribution from their wages under a relief at source scheme, that contribution is actually £250 less £50 tax relief at source (£250 @ 20%). If they are a higher rate taxpayer, they can claim another £50 tax back, to give the full 40% tax relief on £250. When multiplied by several months pay and possibly up to 4 tax years (see below) this could be a substantial additional amount of tax relief / refunds.

If they haven’t done so, employees can claim back 4 years. As we are only 4 weeks from tax year end this is worth considering soon to maximise any possible back claims

 

Here is a link to the HMRC guidance re making claims- 

https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments