Many small employers do not realise that there are two ways that the tax relief on staff members’ pension contribution can be applied and it is important to understand which system you should be using.
1. ‘Relief at source’ means the employer takes the member’s pension contribution after tax has been deducted – and the pension provider claims 20% tax back from HM Revenue & Customs (HMRC) and adds it to their pension pot. Higher rate taxpayers will have to complete an HMRC tax self-assessment in order to reclaim the rest of the tax paid on their contributions. Staff who earn no more than their income tax Personal Allowance (currently £10,600 a year) do not pay tax, but they would still get the 20% tax relief (even though they haven’t paid any income tax on their contributions).
2. ‘Net pay arrangement’ is when the employer does not deduct any tax from the member of staff’s contributions and pays them to the pension provider gross of tax. The member of staff wouldn’t get any tax relief benefit if they earn below the income tax personal allowance. However, higher rate taxpayers may prefer this method, as they would automatically get full tax relief through payroll without having to complete an HMRC tax self-assessment.
For more information please call Helen Miller in our payroll department.