Tax Relief

Tax relief on employer contributions

Employer’s pension contributions are always paid gross and do not form part of your taxable income. This means that you automatically save tax at your highest rate, but you also save both employer’s and employee’s National Insurance on these amounts.

Currently, you will save employer’s NI of 13.8% on any employer’s pension contributions. In addition, you will save employee’s NI of either 8% or 2%, depending on your overall income.

Employee contributions – basic rate tax relief

Personal contributions to a Personal Pension are always paid net of basic rate tax and any employee’s pension contributions are deducted via payroll under a “Relief at Source” arrangement.

This means that they are taken net of basic rate tax, from your net pay, after tax and NI have been calculated. The pension provider reclaims this basic rate tax for you, and the net contribution is topped up automatically.

For example, a £100 employee contribution is actually deducted as a net amount of £80. The provider claims the £20 tax for you, and tops the total amount back up to £100.

Employee contributions – higher rate tax relief

Everyone receives basic rate tax relief automatically. However, if you pay higher-rate tax, you are due an additional 20% or 25% relief, depending on your personal circumstances.

This is normally obtained by completing a tax-return, and HMRC will then either pay a tax-rebate or will adjust your tax-code to take account of the additional tax-relief that is due. You may also contact HMRC directly to arrange a rebate or request a tax-code adjustment.gna aliqua.

Additional “salary exchange” contributions

If you want to pay extra contributions, in addition to those required under auto-enrolment, these will be deducted under a “salary exchange” arrangement and treated as employer contributions. This maximises your tax and NI savings, as outlined above.

There is a limit to the amount that can be paid using salary exchange – any remaining income must not fall below the National Living Wage or National Minimum Wage.