Pensions Tax Treatment

Tax Treatment on Pension Contributions.

There are two different methods, Net Pay Arrangement and Relief At Source.

Relief At Source is used by:

Nest

Peoples Pension defaults to this

Legal and General

True Potential, TPLLP

Royal London

Net Pay Arrangement is used by:

Now

Creative Pension

Smart Pension

Peoples Pension can be changed to use this

Relief At Source example

Tax code 1150L

Salary                    2000.00

Tax             208.00

NIC             158.40

Pen Cont      12.08  378.48

Net Pay                £1621.52

* Qualifying Earnings assessment  2000.00-490.00= 1510.00

  1% less Basic Rate @ 0.8% of 1510.00 = £12.08

The Pension Provider receives the  12.08

+ the employers contribution           15.10

+ Government contribution of 20%   3.02

Saved in to the PP scheme              £30.20

Net Pay Arrangement example

Tax code 1150L

Salary                     2000.00

Tax*            205.00

NIC              158.40

Pen Cont*     15.10  378.50

Net Pay                 £1621.50

* Qualifying Earnings assessment  2000.00-490.00= 1510.00

  1% of 1510.00 = £15.10

* Tax is calculated on 2000.00-15.10 = 1984.90

The Pension Provider receives the  15.10

+ the employers contribution           15.10

Saved in to the PP scheme              £30.20

As can be seen the calculations result in the same figures, the odd variation of 2pence will resolve itself over the year.

There are, however, two fundamental differences:

One, When an employee has Higher/Additional earnings then with a Net Pay Arrangement they will get automatic tax relief whereas with a Relief at Source scheme they will have to claim back from HMRC their overpayment of tax.

Two, When there are employees NOT paying tax then they will get NO tax benefit from a Net Pay Arrangement. In a Relief at Source scheme the PP will still get the 20% notional tax from HMRC.

There is also Salary Sacrifice.

This is where the employee reduces their income by the notional pension contribution and the employer pays it.

This means that the employee will be saving on Tax AND Nic contributions at their marginal rates.

Again this is not much good for an employee who is not paying Tax and perhaps no Nic either.

Good info here:

http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0491

https://www.gov.uk/workplace-pensions

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