What’s the difference between net pay and relief at source pension contributions?
This article describes the difference between net pay and relief at source pension contributions and how to enter these in FreeAgent.
When you’re creating a payroll profile for an employee and you select ‘Yes’ for ‘Is this employee making monthly pension contributions?’, you need to enter some more detail. Find out how FreeAgent can automatically calculate the pension contributions.
You need to enter their contributions as either ‘Net Pay, ‘Relief at Source’ or 'Salary Sacrifice'. The difference between these is how the tax is calculated. If you’re unsure which box to enter the employee’s pension contribution in, please ask your accountant or HMRC.
Net pay contributions
If the business pays the pension contribution out of the employee's gross salary and the pension company doesn’t claim tax relief for the employee, it would be a net pay arrangement pension. FreeAgent assumes the employee is eligible for tax relief and the pension scheme is registered with HMRC.
When an employee’s pension contribution is entered in the ‘Net Pay’ box, the tax will be worked out on their gross salary minus their pension contribution. For example, if the employee’s gross salary is £2,000 per month and their pension contribution is £200, they would pay tax on £1,800.
Relief at source contributions
If the pension company is claiming tax relief for the employee, then the employee is paying the contribution out of their net salary, which is a relief at source pension.
When an employee’s pension contribution is entered in the ‘Relief at Source’ box, the tax will be worked out on their gross salary, ignoring their pension contribution. For example, if the employee’s gross salary is £2,000 per month and their pension contribution is £200, they would pay tax on £2,000.
In this scenario, the pension scheme administrator claims the extra tax back from HMRC and adds the equivalent amount to the employee’s pension fund.
Salary Sacrifice contributions
When ‘Salary Sacrifice’ is used as the contribution type, the pension contribution is taken before the deduction of Income Tax and National Insurance.
Entering pension contributions on a Self Assessment tax return
Pension contributions that are deducted through payroll don't usually have to be entered on a Self Assessment tax return. However, if you’re a higher-rate taxpayer and the employer is operating a relief at source scheme, you’ll need to add your pension contributions to the Main Return page in order to claim higher rate tax relief.
If you’re unsure which rate you pay tax at or whether you should include your pension contributions on your tax return, please ask your accountant or HMRC.