Introduction
When a UK worker contributes to a pension scheme, their contributions are usually eligible for tax relief. There are two methods of UK tax relief commonly used by pension providers. These are the Net Pay and Relief at Source methods, and they affect the way in which employees' contributions are deducted from payroll.
When integrating to multiple destinations it is important to understand which tax relief method each destination uses and how to ensure the correct information is being communicated to payroll, so that the right deductions are taken at the correct point in the payroll process.
Methods of tax relief
Net Pay
This means that worker contributions are deducted gross from pre-tax pay. This method is sometimes called "Gross" because the contributions are deducted from gross pay. Note, although the employee's tax is reduced due to the pension contributions coming from Gross pay, the NICs are still payable for the full amount including pension contributions.
For example, a worker with pensionable earnings of £1000 whose contributions are calculated based on 5% of pensionable earnings must be calculated as follows:
- £1000 x 5% = £50 deducted from pre-tax pay and sent to the provider.
- No tax has been paid on the contribution amount so the employee gets tax relief in payroll, and there is no tax relief added by the pension provider.
- Higher rate tax payers do not need to claim additional tax relief via their personal tax returns.
Relief at Source
This means that employee contributions are deducted from take-home pay net of basic rate tax relief. This method is sometimes called "Net" because the contributions are deducted from net pay.
For example, a worker with pensionable earnings of £1000 whose contributions are calculated based on 1% of pensionable earnings must be calculated as follows:
- £1000 x 5% x 0.8 = £40 deducted from take-home pay and sent to the provider.
- The £10 tax relief due on this contribution is added by the pension provider and reclaimed via HMRC.
- Higher rate tax payers may be able to claim additional tax relief via their personal tax returns.
How these are communicated in PensionSync
Net and Gross contribution rates
Because employee contributions attract tax relief the percentage rate to be used for calculation can be expressed in both Net and Gross accounting terms:
Net = the percentage rate excluding tax relief.
Gross = the total contribution amount including tax relief.
Which destinations use which methods
The below table shows which destinations use which methods of tax relief and how they express the EmployeeContributionPercent in the Scheme data in PensionSync:
Destination
|
Method
|
Net or Gross in SASS data
|
Comments Please note that SASS data only contains the default / minimum / maximum contribution rates for the scheme (as applicable). Contribution percentage rates may vary by individual scheme member. |
---|---|---|---|
Aviva | ReliefAtSource | N/A | This destination does not return EmployeeContributionPercent in Scheme data (or EmployerContributionPercent) |
Legal & General | ReliefAtSource | Gross | EmployeeContributionPercent delivered gross e.g. the full contribution amount including basic rate tax relief. Where basic rate tax relief applies, the deduction should be calculated as 80% of the rate stated in the Scheme data. |
NOW | NetPay | Gross | EmployeeContributionPercent delivered gross. The deduction should be calculated using the actual rate stated in the Scheme data. |
NEST | ReliefAtSource | Gross |
EmployeeContributionPercent delivered gross e.g. the full contribution amount including basic rate tax relief. Where basic rate tax relief applies, the deduction should be calculated as 80% of the rate stated in the Scheme data. If a worker does not have a National Insurance Number and is not a foreign national awaiting a National Insurance Number, NEST cannot claim tax relief. In this scenario the deduction should be calculated using the actual rate stated in the Scheme data. |
Smart | NetPay | Gross | EmployeeContributionPercent delivered gross. The deduction should be calculated using the actual rate stated in the Scheme data. |
TPP |
ReliefAtSource or NetPay |
Net or Gross |
ReliefAtSource - EmployeeContributionPercent is returned net of basic rate tax relief. For example a gross contribution of 1% would be returned as 0.8% to account for the 20% tax relief. NetPay - EmployeeContributionPercent delivered gross. In either case, the deduction should be calculated using the actual rate stated in the Scheme data. |
Salary Sacrifice
If employee pension contributions are paid via salary sacrifice, this means that they are not deducted from the worker's pay. Instead, the worker agrees to a reduction in their contracted salary, and the employer agrees to compensate them for this by paying a higher pension contribution. Because the salary sacrifice contribution is paid by the employer it does not attract tax relief (although this is normally accounted for in the calculation of the amount of contribution the employer pays).
Normally, salary sacrifice contributions are expressed with the whole contribution included in the EmployerContributionPercent and the EmployeeContributionPercent shown as 0.
For example, a scheme set up on the 2019 statutory minimum rate (minimum contributions must be at least 8% of which the employer pays at least 3%) would be expressed as follows:
Type
|
EmployeeContributionPercent
|
EmployerContributionPercent
|
Comments
|
---|---|---|---|
Non-Salary Sacrifice | 5 | 3 | The 5% employee contribution is deducted from the worker's pay using either ReliefAtSource or NetPay tax relief method (see above for details of how this affects the way the contributions are deducted from the worker's pay). |
Salary Sacrifice | 0 | 8 | The 5% employee contribution is now included in the total 8% paid by the employer. The worker's contractual salary has been reduced in favour of the additional employer contribution, so there is no further deduction from the worker's pay. |
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