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.
In common with the majority of trust based pension schemes, NOW: Pensions operates a net pay arrangement which means that pension contributions are collected from gross earnings before income tax is calculated and applied. This means for taxpayers, full tax relief at their 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 sends 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 income tax, do not get tax relief on their pension contributions from the government.
In relief at source schemes, all savers receive tax relief even if they don’t pay income tax. The government is considering how to address this inequality, but in the meantime, earlier this year NOW: Pensions committed to ensuring those who do not pay income tax are treated fairly by topping up the tax relief shortfall for such scheme members in respect of the 2017/18 tax year. NOW: Pensions is the only net pay scheme offering a top up.
Individuals who pay into the NOW: Pensions scheme and have total earned income for the 2017/2018 tax year of less than £11,500 per annum, may be eligible to receive our top up.
We’re currently updating the tax relief top up form and it will be online in few weeks.