Pensions tax relief
19 August 2015
It is very important that whoever is doing the payroll knows what type of tax relief to use when calculating the member’s contributions. If payroll is not set up correctly, the wrong employee contributions will be taken.
With “Relief at Source” (RAS), the employer reduces the full member contribution by the equivalent of the basic rate of tax (20% at present) and deducts the reduced amount from the employee’s net pay, which is paid over to the pension provider. The pension provider then claims the 20% basic rate tax relief back from HMRC and adds it to the member’s pension pot. Higher rate tax payers will need to claim any additional tax relief due on their pension contributions from HMRC directly via Self Assessment. For example, a worker with pensionable earnings of £1,000 and a 1% contribution would have £8.00 deducted from net pay and paid to the provider who would then claim £2.00 from HMRC, so that a total of £10.00 is paid into their pot.
“Net Pay Arrangement” is when tax relief is applied by payroll (so the employer gives tax relief on the pension contribution as part of the normal payroll process, i.e. the pension contribution reduces the worker’s taxable pay and tax is calculated on the reduced pay accordingly).The full contribution is then paid over to the pension provider. For example, an employee with pensionable earnings of £1,000 and a 1% contribution would have £10.00 deducted from gross pay and £10.00 would be paid to the pension provider.
If, in both of the above examples, the employer’s contribution is also 1%, then another £10.00 would be paid by the employer to make a total of £20.00 paid into their pot.
Most pension providers only support one of these methods – so you should find out which one needs to be used.
Consultation on pensions tax relief
The government is consulting on whether there is a case for reforming pensions tax relief to strengthen incentives to save and offer savers greater simplicity and transparency, or whether it would be best to keep with the current system.
The Policy Team will be issuing a survey shortly so please do take the time to give your views.