The pension landscape in the UK is complex but filled with opportunities for both employees and employers.
Among the various incentives, the tax relief on employee contributions to registered pension schemes stands out as a prominent benefit.
Understanding Pension Tax Relief
Pension tax relief is a government initiative designed to encourage savings for retirement. In the UK, employee contributions to a registered pension scheme attract tax relief at the individual’s marginal rate of income tax.
However, there exist two primary methods for employers to attain tax relief on employee pension contributions.
Some confusion has arisen in this area, with HMRC noting mistakes made by employers, possibly due to the specific terminology associated with each method.
These two methods are termed:
Net Pay
Net Pay is a process where the employer deducts the pension contribution eligible for relief from the employee’s gross income prior to the application of PAYE. This way, employees obtain tax relief at their marginal rate of income tax without the need to make any separate claim.
Relief at Source
Relief at Source is a process where contributions are deducted from the employee’s net salary (i.e. after tax has been deducted). However, the employer deducts only 80% of the total contribution from the employee’s salary; the remaining 20% (tax relief) is reclaimed from HMRC by the pension provider. The scheme adds this top-up to the employee’s contribution irrespective of the employee earning enough to pay tax in the first place.
The pension scheme provider then claims the equivalent basic rate tax from HMRC Pension Scheme Services (PSS), adding the claimed amount to the individual’s pension pot.
For individuals under Relief at Source arrangements, claiming any higher or additional rate tax relief must be done directly with HMRC, either through adjustment to their tax code or Self-assessment.
Tax relief on employee contributions to registered pension schemes is more than just a personal finance matter; it has far-reaching implications for employers as well.
By understanding and leveraging the UK’s pension system, employers can enhance their recruitment strategies, save on NICs, and build a positive corporate image – but the confusion outlined above creates the risk for conflict and disruption.
Ensuring that both employees and employers are well-informed about these benefits is vital.
Want to learn more about some of the common issues related to employee contributions to pension schemes?
HM Revenue & Customs’ (HMRC) latest employer bulletin for August covers this issue and more.
If you would like advice or guidance on this or any other issues related to workplace pension schemes, please speak to our payroll team.