Calculating Pension Contributions
Working out pension contributions for your staff can be a challenge! There are two different ways that employees can obtain tax relief on their pension contributions and the pension scheme will be set up to take one or the other:
- Relief at Source:
- In this method, employee contributions are taken from their net salary (after tax deductions).
- The employer deducts only 80% of the total employee contribution from the net salary.
- Basic rate tax relief is then added to the pension fund by the scheme, which the scheme reclaims from HMRC.
- Net Pay:
- In a ‘net pay’ scheme, 100% of the employee contributions come directly from their gross salary.
- This means the employee pays tax on their salary after the pension contribution is deducted.
- Essentially, they pay tax on a salary that’s ‘net’ of their pension contribution, automatically receiving tax relief at their highest income tax rate.
The Issue:
The terminology can be confusing for employers and you may accidentally set up workplace pension schemes incorrectly.
For instance, you could use a ‘net pay’ arrangement when it should be ‘relief at source,’ or take 100% (instead of 80%) of contributions through ‘relief at source.’
As a result, tax relief may be given twice or not at all!
Mistakes can be costly to resolve.
If you would like support with your payroll, our experts are here to help! We can support you with your payroll and pension contributions if you have only 1 employee or up to 150.
Contact us to find out more: enquiries@cbrsolutions.org.uk
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