New Forest

12/01/2023

Are your employees getting the most from their workplace pension?

There are several variations to consider when setting up a new pension scheme, such as:

  • what element of pay will be pensionable
  • how much will the employer contribute
  • will pension certification be required
  • how will contributions be communicated and paid to the pension provider.

The other main consideration is the contribution deduction method, i.e., how the employee pension contributions are taken from the employee’s salary. There are a few options:

  • Net pay – taken pre tax
  • Relief at source – net contribution based on 80% of percentage with 20% tax relief claimed by the pension provider from HMRC
  • Salary sacrifice – employee gives up the right to salary in exchange for an increased employer pension contribution.

Where the employer is using a relief at source pension scheme, which is relatively common under auto enrolment, all employees are treated as basic rate (20%) taxpayers. This penalises higher rate taxpayers who would have to claim higher rate tax pension relief.

How does Relief at Source work?

When a contribution is taken from the employee, 80% of the gross contribution is deducted from net pay, i.e. after tax and National Insurance. Once contributions are submitted to the pension provider, they will claim the additional 20% of the gross contribution as tax relief and top up the pension pot.

Example (ignoring qualifying earnings):

£1,000 Pensionable Pay x 5% minimum employee contribution x 80% = £40 employee net contribution

£40 employee net contribution / 80% x 20% = £10 Tax Relief claimed from HMRC

£40 employee net contribution + £10 Tax Relief claimed from HMRC = £50 total invested employee contribution

What do higher rate taxpayers need to do?

Any higher rate taxpayers that are contributing into a relief at source pension scheme will need to apply for the higher rate tax relief direct with HMRC. This can be applied for in two ways:

  • Self-assessment – this would be done online, where the taxpayer would state the total gross contributions for the tax year. The additional tax relief would be either supplied as a rebate at the end of the tax year, a reduction in tax liability or an increase in personal allowance through the employee’s tax code for the following or current tax year.
  • Write to HMRC – the taxpayer would include details of earnings, pension contributions and personal details, so HMRC can calculate the relief. By using this method, a letter would be required every time there was a change in pension or salary.

Previous tax year claims can be made but there is a time limit, and taxpayers can currently only claim for the last four tax years.

For further information on workplace pension, please contact James Alesbury on 023 8046 1222

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