Tax Relief for Auto-Enrolment

Tax relief in auto enrolment

The majority of people will receive tax relief from the Government when they pay into a workplace pension - this is one of the major benefits of saving into a pension.

Tax relief can be applied to a pension in two different ways; the net pay arrangement and the relief at source method. Ultimately, the amount of tax relief that your employees receive will be the same, but the way tax relief is treated will affect what they see on their payslips.

Relief at source

Relief at source is always used for Group Personal Pension (GPPs). This is the method of tax relief that is applied to an Aviva workplace pension.

Under relief at source, employee pension contributions are taken from an employees pay after tax and national insurance have been deducted. The contribution that is deducted is net of basic rate tax relief - this means that 80% of an employee’s pension contribution is taken from an employee’s net salary. The 20% basic rate tax relief is added to their pension pot by Aviva, who then claim it back from HMRC. Higher or additional rate tax payers will normally claim their extra tax relief through their self-assessment.

Example: Peter’s tax relief using the relief at source method.

Peter draws a gross salary of £2,500 per month. He contributes 10% of his salary to his workplace pension. Peter actually makes a net contribution of 8% (10% minus the 20% tax relief) of his gross salary (£200). Aviva then add the 20% basic rate tax relief (£50) and reclaim this amount from HMRC. Peter’s employer contributes 4% of his gross salary (£100). In total, Peter will benefit from a total pension contribution of £350.

Net pay arrangement

A net pay arrangement is usually used by occupational pension schemes and is used by Aviva Master Trust.

A net pay arrangement is where pension contributions are taken from an employee’s gross salary before income tax is deducted. This means an employee receives their tax relief via PAYE at their highest marginal rate and do not have to claim additional amounts from HMRC if they pay income tax at higher than basic rate.

This also means however that employees who don’t pay income tax don’t benefit from the same government contribution as taxpayers. Contributions will cost non-taxpayers more in a net pay scheme than in a relief at source scheme.

Example: Liz’s tax benefits using the net pay arrangement

Liz draws a gross salary of £2,500 per month. She contributes 10% (£250) of her salary towards her workplace pension and receives an employer contribution of 4% (£100). Her employer deducts Liz’s pension contribution from her gross salary before deducting tax. In total, Liz will collect a monthly pension contribution of £350 including £50 tax relief.

Using the relief at source method
Gross salary per month £2,500
Employee pension contributions £200 (deducted from net salary)
Employer’s contribution at 4% £100
Tax relief £50 (claimed back from HMRC and added to pension pot)
Total contribution to pension pot £350

Using the net pay arrangement
Gross salary per month £2,500
Employee pension contributions £250 (deducted from gross salary)
Employer’s contribution at 4% £100
Tax relief £50 (claimed before income tax is deducted)
Total contribution to pension pot £350