HMRC data shows that a size-able number of employers are applying the wrong tax relief basis to their workplace pension scheme. Some pension scheme members are consequently receiving double reliefs (within payroll and the pension scheme) they are not entitled to, others receiving reliefs when salary sacrifices are being operated (being reported as employee contributions when they are not) and some where no tax relief if being operated when it should.
So the August 2023 edition of the Employer Bulletin covers different methods of tax relief for pension schemes, namely, Net Pay Arrangements (NPA) & Relief at Source (RAS). The terms are confusing and in reality may appear to mean the opposite of what they are named.
The Bulletin attempts to clear up confusion among employers by suggesting a new naming convention, which may in fact, muddy the waters further.
See our guide below where we discuss the different types of tax relief.
Net Pay Arrangement
Whilst named the ‘Net Pay Arrangement’, this pension contribution is taken before tax. This has the effect of making the contribution tax free, but will still be subject to National Insurance.
So may say this is a deduction from Gross.
Relief at Source
HMRC have taken to naming the RAS method within this bulletin as ‘not net pay’. This is confusing, as they then indicate that the pension deduction is taken from net pay after tax and NI.
The tax relief is provided to the pension scheme (not a payroll activity), with the government topping up the contribution by 25%.
Any higher or additional rate earners should seek to reclaim the remaining tax relief via their Self Assessment return.
What about Salary Sacrifice?
Salary sacrifice is not a method of tax relief. Instead the employee consents to a pay cut of the amount to be contributed, which is then submitted to the scheme as an employer contribution. This has the effect of lowering both the tax paid by the employee, and NI paid by the employer and employee, as the money has not been received as pay by the employee.
Does SD Worx Pay Solution support the different types of Pensions Tax Relief?
Absolutely – The comprehensive SD Worx payroll engine supports the vast majority of pension scheme configuration requirements whether:
- Net Pay Arrangement – deductions from payroll are pre-tax
- Relief At Source (or Not Net Pay) – the deduction from payroll are after tax based on the full instructed amount – the pension scheme will claim a 25% top-up
- Relief At Source (or Not Net Pay) – the deduction from payroll is based on the instructed amount being reduced by 20% – the pension scheme will claim a 25% top-up
- Non-approved scheme – there is no tax relief
- Salary Sacrifice arrangements – where the employer undertakes a contractual cut in pay to receive a higher employer contribution.
And the solution support Pension Auto Enrollment duties with options for automatic assessment, postponement and enrollment actions. Let the solution take the strain.
I’m so confused on the mix up of Net and Not Net!
The terms originate from an HMRC point of view and so can appear backwards.
Employers often refer to RAS as a ‘net pay scheme’ and consequently the wrong tax relief status is marked in Payroll as net pay schemes are pre-tax. And when pension schemes change, the tax status can also change – consequently the configuration options may be different.
So how can employer avoid an expensive mistake?
SD Worx Payroll HR and Legal Services (PALS) offer a service to check pension scheme setups. This service is available to both SD Worx Client and non-client employers. The PALS team panel or experts can review pension setup parameters provided, and respond on confirmation of correctness or recommendations on corrective activity where they may be wrong.
Want to know more?
The SD Worx Academy has a number of training courses and webinars that may assist.
Join our training course webinar:
Pensions and Payroll | SD Worx Academy for more information about pensions and tax relief.
Salary Sacrifice: What it is and why for more information about Salary Sacrifice which includes pensions.
We also have information available on how to apply pension data at SDWorx-Pay – Pensions
Need some help
We offer consultancy services for employers struggling with their payroll pensions settings. Please fill in the form below to get in touch and receive a quote.