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Do you know if your workplace pension scheme contributions are net pay or relief at source?

I suspect that most people can’t answer this off the top of their head! But it’s a question that’s important for the self assessment tax return, particularly if you pay tax above the basic rate. There may be tax savings here if you’re a higher rate or additional rate tax payer.

Tax on pensions

The important thing to remember is that pension contributions are not taxed. The government wants to encourage you to save for your pension, so this is an incentive. Later, when you take the money out in retirement, some of it will be taxed (but that’s another story).

There are two ways to make sure the pension contributions are not taxed, you can either take the contributions before any tax is paid, or you can take them after tax is paid and then give that tax back. Net pay and relief at source are the most common names for these two basic methods.

Net Pay

Net pay, gross tax basis, salary exchange, salary sacrifice all work in a similar way for income tax. Pension contributions are taken out of the salary before tax.

Salary exchange / salary sacrifice schemes are a bit different in terms of some other aspects of how operate, but that is outside the scope of this article which is just looking at the income tax.

This means that tax relief is direct. No matter what rate of tax will be applied to the salary, the pension contributions are being taken out before that tax is deducted. They are made from untaxed income.

If your workplace pension scheme uses this method for making contributions then there is nothing further that you need to do in your self assessment tax return. You’ve already received all the tax relief.

Relief at Source

Relief at source is also very confusingly known as net tax basis. This method is more complex as pension contributions are taken out of the salary after tax and then the tax is effectively given back.

The contributions are taken from your taxed income and then basic rate tax (currently 20%) is added back by the pension scheme provider. You might hear this referred to as the contributions being “grossed up”. The pension scheme provider claims the tax back from HMRC.  

Even employees who don’t earn enough to pay tax, get their contributions grossed up so this method can be beneficial for low earners.

Conversely this method is not ideal for higher earners who pay tax above the basic rate. They are making contributions from income that is taxed at 40% or 45% but are only getting 20% tax back automatically. The additional 20% or 25% has to be claimed via the self assessment tax return.

Can I ask for the method to be changed?

The method applies to the whole workplace pension scheme and can’t be altered for individual employees. It’s unlikely to be something that you can change, unless it’s your own business.

Which method is most common?

Different types of scheme may be more likely to use one particular method, for example:

People’s Pension and NEST

The default for these workplace schemes is relief at source (net tax basis) where contributions are taken from the pay after tax and the pension provider adds back the basic rate tax. The employer can choose to use other methods if they want, but the vast majority of People’s Pension or NEST schemes will be relief at source. 

Other workplace pension schemes

Your employer may choose the contribution method based on the salaries levels across the workforce. If most employees are paying higher rate tax then the net pay would be a better option. But in general there are more schemes that use the relief at source method. Some workplaces may operate salary sacrifice / salary exchange which works like net pay in term of the income tax, but slightly different for the national insurance contributions.

Private Pension

If you have a private pension that is not deducted via a workplace payroll, it will be relief at source. This is because when you make personal contributions, they are from your taxed income. If you pay tax above the basic rate, the additional tax relief will need to be claimed in your self assessment.

A limited company can make direct contributions to a director’s private pension. This is different to having a workplace or company pension. It’s also different to using the company bank account to make personal contributions to a private pension. To set up company contributions usually requires completing a specific employer contributions form with the pension provider. In this case there is no personal tax relief to be claimed; instead the pension contributions are a taxable expense for the company which is gaining corporation tax relief.

Why should I bother including my pension contributions on the self assessment?

If you’re a higher rate tax payer on a relief at source scheme, then claiming that extra 20% or 25% via your self assessment will save you money. The tax relief is offset against the tax that you owe on other income to reduce the tax that you owe. Depending on your particular circumstances it will reduce your tax bill, give you a refund or result in a change to your tax code (to reduce the tax paid on your salary).  

One thing to note is that you will only get the extra relief on the income that has been taxed above basic rate e.g. if you pay £15,000 into your pension but only £10,000 of your salary has been taxed in the higher rate, then you will only get the extra 20% relief on that higher rate £10,000.

If you are not registered for self assessment then it’s also possible to claim the additional tax relief on your pension contributions by writing to HMRC.

If you’re a basic rate tax payer then it won’t be necessary to enter the contributions in your self assessment as there is no tax benefit to be gained. You’ve already had the 20% tax relief from your pension provider.

However, if you do work with an accountant for your tax return, you should always provide them with the pension figures if you can. Until they’ve done a full assessment of your income, it’s not always clear whether or not the pension contribution information will be required.

What figures should be included?

You need to include your gross pension contributions on the self assessment tax return.

This is just the contributions that you made, don’t include those made by your employer.

The figure should include the basic rate tax relief element that has been added by your pension provider. You are looking for the grossed up figures for the employee contributions.

If you know what you contributed before the 20% tax relief element (net figure), then you can work out your grossed up figure.

Divided the net figure by 80 then multiply by 100 for the gross figure e.g. £200 net would give £250 gross including the 20% tax relief.

What do need to I ask my payroll or pension provider?

Step 1 is to find out what scheme you are on. 

We’ve found that when our clients go to speak to their payroll or pension provider about their pensions it can have varying success because the terminology is pretty confusing. There are many different names, net pay and net tax basis sound similar but are different methods.

What you need to try and find out is whether your pension contributions come from your salary before tax is deducted (net pay / gross tax basis / salary sacrifice) or after tax is deducted (relief at source / net tax basis). You (or your accountant) may be able to work this out by looking at your pay slip, depending on how it’s formatted.

If it’s a Relief at Source scheme, Step 2 will be to get the figures you need for your return.

You need to find out the gross pension contribution figures for the tax year. Again, your accountant will be able to help interpret any reports or information you receive.

How can CooperFaure help?

If you need support claiming pension tax relief in your self assessment, or aren’t sure whether you need to, then maybe our personal tax team can help? Just get in touch via email on personal.tax@cooperfaure.co.uk or give us a call.

Pension Planning Tax Return

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