Pension tax relief basics for employers
Learn about the tax relief your employees get to encourage saving.
How does tax relief work?
Tax relief is designed to encourage pension saving. It means employees pay less income tax because some of their money is going into a pension before tax is taken.
There are 2 methods of pension contribution tax relief: relief at source and net pay arrangement. Their effects are different, depending on whether your employee is a basic rate or higher-rate taxpayer.
Relief at source
- Your employee pays tax, then their pension contribution is taken.
- People’s Pension claims 20% of the contribution back (the tax) and put it into the employee’s pension.
- This approach benefits lower earners because contributions automatically receive 20% tax relief – even those who don’t pay tax still get the government top-up.
We automatically claim and apply tax relief at 20% within approximately 3 months for all members. However, if any of your staff are higher-rate taxpayers – paying tax at a rate above 20% – they’ll need to claim any additional tax relief through their Self Assessment tax return, as this isn’t applied automatically.
Here’s how it works in practice
Let’s say Charlie wants to contribute £1,500 of his £30,000 salary into his pension, which uses relief at source:
| Income tax paid | Pension contribution | Tax relief added |
|---|---|---|
| £3,486 | £1,200 | £300 (total pension contribution £1,500) |
Charlie gets an extra £300 paid in to his pension thanks to tax relief.
Net pay arrangement
- With this method, your employee’s pension contribution is taken before tax.
- As their taxable salary is reduced, they pay less income tax – this reduction is how the tax relief is provided.
- It’s easier for higher-rate taxpayers – they won’t have to fill in a tax return, but employees who don’t pay tax (because their income is below the taxable threshold) won’t get tax relief, as they would with relief at source.
Let’s break it down with a simple example
Meet Steph, who also wants to contribute £1,500 of her £30,000 salary into her pension. Her pension uses a net pay arrangement, so her income tax is lower:
| Income tax paid | Pension contribution | Tax relief added |
|---|---|---|
| £3,186 | £1,500 | £0.00 (the tax relief is given by reducing taxable pay) |
Steph gets an extra £300 paid in to her pension thanks to tax relief.
What tax relief method does People’s Pension offer?
At People’s Pension, our default method is relief at source.
We also offer the net pay arrangement. To set up this method, call us on 01293 586666.
What do you need to do?
Check the details
The employee payroll details you use for PAYE submissions to HM Revenue & Customs (HMRC) must be the same as those used for tax relief. Mistakes can be costly and difficult to fix. It can be tricky, but we’re here to help.
We’ll get in touch to check your payroll has been set up with the correct tax basis. We’ll also ask you to confirm you understand the tax basis every year.
Remember, you can contact us at any time or talk to a real person at our UK-based contact centre. And if you think something has gone wrong, email us for support: taxrelief@peoplespartnership.co.uk
Communicate clearly
Help your staff get to grips with tax relief by clearly communicating the facts. Make it easier on yourself.
Want to know more?
Get more information and advice about tax relief from HMRC and The Pensions Regulator (TPR):
What is salary sacrifice?
Salary sacrifice (also known as ‘salary exchange’) is a third option you can offer employees. It’s a tax-efficient way to boost your employer and employee pension contributions at no extra cost to your business. Through salary sacrifice, your employee agrees to reduce their earnings by an amount equal to their pension contribution. In return, you pay that money directly into their pension as an employer contribution, on top of your existing contributions. As a result, your employee will pay less income tax. You’ll both save on National Insurance contributions (NIC) too, because pension contributions reduce the amount of pay that NICs are calculated on.
