Tax Relief for employee earnings under a PAYE Scheme
There are two ways members may receive tax relief on their pension contributions.
Relief at source
Under Relief at Source the deduction from the employee’s pay is only 80% (so long as basic rate tax is 20%) of the employee’s gross contribution to be invested. The remaining 20% is collected by Supertrust from HMRC and invested alongside the amount collected by payroll deduction.
Members who pay higher rates of tax must claim any additional tax relief via their Self Assessment tax return.
If you do not normally pay tax, you are advantaged by Relief At Source since it is applied regardless of whether you have tax against which to apply relief. It means you only pay 80% of the gross contribution due. If you pay higher or additional rate tax you need to claim additional relief via your Self Assessment.
Net pay arrangement
This differs from Relief at Source in requiring 100% of the employee’s contribution to be deducted from pay and passed to Supertrust. But the employer’s PAYE system will be instructed to reduce the employee’s taxable earnings by the employee’s gross contribution.
This reduces the amount of tax paid and is how relief from tax on contributions is delivered by HMRC.
This means members get immediate full tax relief on contributions even if they pay higher rate tax. However, if an employee earns less than the starting rate for income tax no tax relief is obtained and net take home pay will reflect deduction of the full contribution, unlike a tax payer who will see take home pay reduced by an amount smaller than the pension contribution invested.
This method is only available on employee and employer contributions via the employers payroll.
If you do not normally pay tax, you will see a reduction in your take home pay equal to the full contribution, as there is no taxable pay to net off contributions. If you pay higher or additional rate tax, you automatically receive tax relief against that higher rate so you do not need to claim via your Self Assessment.
Be smart with your workplace pension
Employees contributing via their employer’s payroll are typically contributing from Employment income that is deemed by HM Revenue & Customs to be Relevant Pensionable Income.
The Supertrust UK Master Trust is an occupational pension scheme and therefore by default operates pension tax relief on the “Net Pay” basis. The advantage is, that, in a given tax year, individuals can obtain tax relief on payments at their highest marginal rate. To avoid tax, you or your adviser will need to ensure your contributions do not exceed your Annual Allowance, plus any used allowance brought forward.
Not all contributions are paid through the PAYE system, for example contributions from personal savings, if this is the case contributions can only be paid on the Relief at Source basis.
Information provided on the site is merely guidance that may change in line with UK law and regulations. Users must not consider this to be financial advice or their sole resource when making any financial decision. SuperTrust UK Master Trust is regulated by the Pensions Regulator (PSR Number: 10274116) as a provider of workplace pension schemes. All investments of the pension scheme are regulated by the Financial Conduct Authority (FCA). The trustees understand that based on correspondence with the FCA, scheme members have access to compensation under the rules of the Financial Services Compensation Scheme (FSCS) in the event of the insolvency or default by our investment providers.