Employee Pensions – Relief at Source or Net Pay arrangement?

Workplace Pensions can be set up in one of two ways, which will have differing outcomes on the way tax relief is applied to the members’ pension contributions. The method used will often be determined by what your pension provider operates under.

You can choose to deduct your employees’ contributions from their wages either before or after tax (and it is important to get it right):

Deducting employee contributions after tax?

This is known as the ‘relief at source’ method and is most used by ‘Contract Based’ Pension schemes, such as a Group Personal Pensions.

Under this tax basis you would deduct employee contributions from their pay after tax is taken. The pension provider then claims the tax relief – at the basic 20% rate of tax, from the government. This is then added to your employee’s pension savings, even for any employees who do not pay tax, which is good for part-time workers.

However, any higher or additional rate taxpayers will need to claim the extra tax relief direct from HMRC through their tax returns.

Deducting employee contributions before tax?

Known as the ‘net pay arrangement’ method, this is most used by ‘Trust Based’ Pension schemes, such as a Master Trust.

Under this tax basis you would deduct employee contributions from their pay before tax is taken. Therefore, your employees will automatically get full tax relief on their contributions straight away, but, unlike the ‘relief at source’ method, it means lower paid employees who do not pay tax, will not receive any tax relief.

For more information on the net and gross tax basis – please visit: HMRC or The Pensions Regulator