There is also a basic amount £3,600 (£2,880 net) that any UK resident can pay in and get tax relief on, even if they have no earnings at all.
Net pay
Under net pay arrangements, tax relief is granted by means of payroll deductions by the employer. Only occupational pension schemes sponsored by the employer making the deductions can accept these relieved contributions.
All employees who are members of the scheme must get net pay relief – it is not possible for some members to have relief at source and others net pay.
The amount of the pension contribution deducted before income tax is calculated under pay as you earn. The full amount is then paid by the employer to the pension.
There are benefits and drawbacks of net pay. For an individual paying tax at a rate higher than basic rate, then net pay can be beneficial as full tax relief is granted at outset and there is no need to complete a self-assessment or contact HMRC.
There is also no wait period for the tax relief to be applied to the pension.
The losers under net pay are low earners. This is because the 20 per cent tax relief on income that is not taxed (as discussed under RAS above) does not apply under net pay.
As tax is calculated after the pension deduction, there is no tax relief for income that did not have tax due on it in the first place. This is a long-running disparity in the system, which disadvantages low earners in net pay schemes versus their counterparts in RAS schemes.
The government has put a plan in place to try to alleviate this issue. However, it does not come into force until 2025-26 for claims to be made relating to the 2024-25 tax year. Under the system, a top-up will be made available to low earners in net pay schemes.
The plan is that HMRC will notify eligible individuals and invite them to provide the necessary details for the top-up to be paid to them directly. This will be a payment into their bank account, as opposed to the pension scheme, so will not put them in quite the same position as those using RAS.
It will also be interesting to see how many return the necessary information, given it requires action rather than being an automatic process.
Salary sacrifice
Salary sacrifice is not a method of receiving tax relief as such, rather it is giving up some salary in exchange for higher employer contributions. This can be beneficial to both parties involved.
