Confused by Tax Relief at Source for Pensions?

Auto enrolment has been with us for a while now. Employers are required to automatically enrol all eligible workers into a pension scheme in which a minimum total contribution comprises: the employer’s contribution, the worker’s contribution and tax relief. The government offers financial incentives to encourage individuals and employers to save for their retirement and one of these is pensions income tax relief. But isn’t it all a bit complicated? We explain.

What are the Tax Relief Bands?

Tax relief is given on your pension contributions at the highest rate of income tax you pay, meaning:

  • basic-rate taxpayers get 20% pension tax relief
  • higher-rate taxpayers can claim 40% pension tax relief
  • additional-rate taxpayers can claim 45% pension tax relief.

Except in Scotland, that is, where income tax is banded differently, and pension tax relief is applied differently:

  • Starter rate taxpayers pay 19% income tax but get 20% pension tax relief
  • Basic rate taxpayers pay 20% income tax and get 20% pension tax relief
  • Intermediate rate taxpayers pay 21% income tax and can claim 21% pension tax relief
  • Higher-rate taxpayers pay 41% income tax and can claim 41% pension tax relief
  • Top rate taxpayers pay 46% income tax and can claim 46% pension tax relief.

It all Depends on the type of Pension Scheme

The way tax relief is obtained depends on the type of pension scheme you are saving into, and it may be useful to check with your scheme provider to see what method it uses. There are two main ways:

  • Relief at source scheme – pension contributions are deducted after the tax calculation has been performed.

‘Relief at source’ (RAS) applies to all personal pensions and some workplace pensions. The pension contributions in a RAS scheme do not affect the calculation of taxable pay. Pension contributions are deducted net of tax at the basic rate (currently 20%). So, for example, a net pension contribution of £80 means that £100 is credited to the pension scheme – £80 from the individual and £20 from the pension provider. The scheme administrators will later claim the basic rate tax relief back from HM Revenue & Customs (HMRC).

All individuals get the benefit of tax relief at the basic rate in a RAS scheme, regardless of whether they are a taxpayer or not. But the downside of this type of scheme for higher paid workers is that if they are a higher- or additional-rate taxpayer they must complete a self-assessment tax return to receive the extra relief due to them.

  • Net pay arrangement scheme – pension contributions are deducted before the tax calculation is performed.

The ‘net pay arrangement’ is used by some workplace pensions and all public sector pension schemes and generally does not require you to do anything to get full tax relief. Your pension contributions are deducted from earnings before income tax is calculated, which means that you receive the benefit of tax relief at the point the contributions are deducted.

For example, an employee decides to contribute £100 to the pension scheme each month. £100 is deducted from the employee’s gross pay, reducing the employee’s taxable pay, which reduces tax due by £20 (for a basic rate taxpayer). The employee’s actual contribution to the pension scheme is £100.

Need Help With Pension Tax Relief at Source?

If the answer is yes, please contact us for a FREE initial chat. We provide an outsourced payroll service that is quick, efficient and accurate. Most of our clients use us because they are small businesses without a dedicated payroll or HR department and want to get on with running their business rather than worrying about payroll. If this sounds like you, we would love to hear from you.

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