Help Centre for Employers

What’s the difference between net pay and relief at source?

There are two ways pension schemes can collect the tax relief that savers benefit from when contributing to a pension; net pay and relief at source.

NOW: Pensions operates a net pay arrangement and this means the pension contributions are collected before income tax. This means for taxpayers, full tax relief at the highest rate is automatic and no income tax is paid on the money being contributed to a pension.

The alternative system is called relief at source. Here, employers take 80% of an individual’s pension contribution from their take home pay, i.e. after income tax has been deducted. The tax relief is then reclaimed from HMRC by the pension scheme, who send in a monthly request and get the cash back about six weeks later. HMRC only send back the basic rate of tax, namely 20%.

Where an employee in a scheme operating relief at source is a higher or additional rate taxpayer they can claim back the rest of the tax relief themselves from HMRC either by writing to them separately, or through their annual self-assessment tax return.

In a net pay arrangement, employees that don’t pay tax, do not get tax relief on their pension contributions from the government.

NOW: Pensions has announced that it will top up non taxpayers’ pension pots for the 2015/16 tax year. For more info click here.

NOW: Pensions' risk management and diversified growth fund are state of the art. — Win Robbins, former Head of European Fixed Income Barclays Global Investors
We decided to appoint NOW: Pensions because of the simplicity and robustness of its scheme. The NOW: Pensions product is both cost effective and straightforward to implement... — Mark Roberts, Managing Director at gap personnel
We chose NOW: Pensions as it has the best cultural fit for ISS and we believe it will offer our employees the best mix of long term investment returns, strong risk management and low scheme costs for members. NOW: Pensions already has the experience… — Matthew Brabin, CFO, ISS UK
“We were impressed with the simplicity of its scheme. The ease of implementation was also a big plus for us and has removed much of the administrative headache.” — Neil Tune, HR director at Fitness First
Why do we insist on having a choice of fund manager when the evidence shows there is usually no benefit to be gained…and there is always a negative impact in terms of cost? — Anthony Hilton financial editor of the Evening Standard writing in Pensions World, June 2013