We operate a net pay scheme. Pension contributions are deducted from employees’ pay and paid over to the Scheme before income tax is calculated.
You’ll need to:
- calculate pension contributions on gross (before tax) pay and
- work out your employees’ income tax after their pension contributions have been deducted.
As a result your employees who are taxpayers won’t pay any income tax on their pension contributions. They automatically get full tax relief.
Employees who don’t earn enough to pay tax don’t normally get tax relief – but we’ve set up our Scheme so they don’t miss out. We have a tax top-up scheme so employees who don’t pay tax can claim tax relief and have it added to their pension savings in the Scheme. (Employees must claim this themselves – it’s not something you can do on their behalf as their employer.)
What other types of tax relief are there?
There’s another type of tax relief arrangement called relief at source. In this kind of scheme, the employer must deduct 80% of employees’ pension contributions from their take-home pay (after income tax has been taken off).
The pension scheme claims the tax relief from HM Revenue & Customs (HMRC) each month and pays it back to the employee. HMRC only sends back the basic rate of tax: 20%.
Higher or additional-rate taxpayers can claim back the rest of the tax relief from HMRC either by writing to them separately, or through their annual self-assessment tax return.