Switching from a Net Pay to Relief at Source tax method

There are two ways you can get tax relief on your pension contributions. These are known as relief at source and net pay.

Workplace pensions usually operate one of the two tax methods. Penfold is a Group Personal Pension so is a relief at source scheme.

This means pension contributions are calculated from your after-tax pay. Once these contributions are allocated to your pension pot, Penfold will claim the extra 20% in tax relief directly from the government, which is then added to your pension pot.

For example

Net Pay Pension

- Employee will have 5% deducted from their gross salary and paid into pension


- Employee will have 4% deducted from their post-PAYE tax salary and paid into pension, and the extra 1% paid in at a later date as tax relief from HMRC

>> In both scenarios, it's a Net 5% contribution into the pension

With a Net Pay scheme, as the entire pension contribution is taken from their gross salary pre-tax, this means the employee gets their pension tax relief immediately at their highest marginal rate.

For higher rate taxpayers on a relief at source scheme, the same applies as with the basic rate tax relief that's automatically applied by HMRC. However, the higher rate tax (extra 20%) paid on the pension contribution is not automatically claimed back. Rather, the employee has to request this from HMRC. More information is outlined in this blog here.

So higher rate taxpayers will be paying more tax throughout the tax year, but then knowing that at the end of the tax year they'll claim back their higher rate tax from HMRC with Penfold's assistance.

Is there a workaround to this?

Yes! This is where Salary Sacrifice comes into play.

Not only does Salary Sacrifice operate in a very similar way to the Net Pay Arrangement you would've had with your previous provider, but it also enhances employee savings on National Insurance (NI) and increases take-home pay.

Salary Sacrifice works in the same way in that the pension contribution is taken from an employee's gross salary (therefore already inclusive of tax relief), but it also reduces NI tax paid as it's a sacrifice of gross salary which NI tax is calculated on. Net Pay does not "reduce" gross salary, and so NI tax calculations include pension contributions with Net Pay.

As the employee has paid less NI tax with Salary Sacrifice, they've also increased their take-home pay slightly, whilst maintaining the same amount going into their pension.

When switching from a Net Pay to Relief at Source scheme, Salary Sacrifice tends to be the most effective way at not only maintaining employee satisfaction (as you don't have to explain why they're now paying more PAYE tax each month), but also improving the pension offering within the company by highlighting the added benefit of the NI savings.

Learn how to save money with salary sacrifice

Or, find out more about Penfold's tech-first workplace pension that helps your team secure their financial future.

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