Tax Relief on Auto Enrolment Contributions

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This post explains how tax relief works in relation to employee auto enrolment pension contributions. There are two types of tax relief: Net Pay Arrangement and Relief at Source. The method of tax relief used for auto enrolment will depend on your payroll software and the pension provider you choose.

The government takes tax off employees’ income, which is shown on their payslip. Tax relief means that the tax that would have been paid on their pension contribution is paid into their pension instead. For auto enrolment, this tax relief is 20%. This means that for every £0.20 in the pound an employee would have paid in tax on their contribution, it is paid into their pension instead.

As already mentioned, the method of tax relief is determined by the pension scheme provider or, where they offer both types, the employer can decide (for example based on how their payroll software works).

Regardless of which method of tax relief is used, if the employee is a basic rate tax payer, they don’t need to do anything to get the tax relief paid into their pension. It will happen automatically. The exception to this is if they are paying tax at a higher rate.

This is how each type of tax relief works:

Net pay arrangement

This is where the pension contribution is taken out of their earnings BEFORE the tax is deducted. So effectively, they haven’t paid the tax in the first place.

On their payslip, the figure they will see is the contribution and the tax relief added together.

Relief at source

This is where the pension contribution is made AFTER the tax has been deducted, and this tax is then reclaimed by the pension provider directly from the government. So, for every pound contributed to their pension pot, there will be an £0.80 deduction from their take-home pay, and the £0.20 paid in tax is reclaimed from the government by the pension provider.

If the employee is a higher or additional rate tax payer, to get full tax relief they will need to claim back some of their tax from the government. This is because tax relief is added to their pension at the basic rate of 20% but they will have paid a higher actual rate of tax on their contribution.

To get all the tax relief that is due to the employee, they will need to claim back the difference on their annual tax return, or alternatively, if they are a higher rate tax payer they can contact HM Revenue & Customs.

On their payslip, they will see the pension contribution only. They won’t see the tax relief – it is added to the pension separately.

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