Do you know what tax relief elements your pension scheme qualifies for?

Occasionally, our Payroll team sees issues amongst employers and payroll providers with regards to different pension bases and their corresponding tax relief elements. Some firms can be unsure of how their pension scheme is set up, which often leads to large reconciliations of fixed historical issues.

Schemes can be quite complex in terms of employees receiving double tax relief, and often the confusion starts as a result of pension providers calling each tax basis different names. To further add to the confusion, all pension providers can offer any of the tiers at any pension basis, although most providers tend to stick to one or two options to limit things.

The three key pension bases for tax relief elements include;

  • Pre-tax (also known as net pay arrangement)

Under this arrangement, employer’s take their employee’s pension contributions and the government’s contribution as tax relief from your pay before deducting tax. What’s left will be subject to tax.

If an employee doesn’t pay tax, they won’t obtain tax relief under this arrangement, for example, if their income is below the tax threshold.

  •  Net of basic rate tax (also known as relief at source)

As part of this scheme, an employee’s pension contributions are taken from their pay after deducting tax and National Insurance (NI).

The company’s pension provider will then claim the 20% basic rate tax from the government. This is then added to the employee’s pension.

If an employer uses this scheme, the pension contribution figure employees see on their payslips is just their contribution and doesn’t include the government’s contribution.

  •  Salary sacrifice (also known as salary exchange or SMART scheme)

This is an agreement that reduces an employee’s entitlement to taxable and NICable pay in return for a non-cash benefit, which in this case may be contributions into a workplace pension scheme.

Under this basis, employers will calculate employer and employee pension payments using a notional level of pay to ensure workers who participate in salary sacrifice plans are not penalised.

Other salary sacrifice arrangements are also possible. An employer, for example, could agree to pay more than the minimum to cover some or all of the employee’s contribution. As a result, the employee may be entitled to less salary.

With regards to the salary sacrifice scheme, it is important to note that there are potential implications of this scheme reducing employees’ gross earnings. Therefore, it may affect their eligibility for statutory payments including, paternity, maternity, and adoption. Furthermore, as this scheme can bring employees’ pay down, you need to ensure it doesn’t reduce employees’ earnings below the national minimum wage.

The Payroll team at Price Bailey LLP has successful experience in rectifying previous providers’ pension contributions.

This article was written by Zoe Masterson, an assistant manager in Price Bailey’s Payroll team. If you’re having issues with your current payroll provider or would like support resolving backdated pension contributions, then you can contact Zoe or Stuart Curtis, a Payroll Partner at Price Bailey LLP, using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.


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