Tax relief on employee pension contributions

Since the introduction of automatic enrolment, many employees are making contributions via their employment.

There is a number of ways in which relief is given for employee pension contributions. It is important that we understand how relief is given to ensure that you are receiving full tax relief for the contributions you make. 

Types of employee contributions:

  • Salary sacrifice – part of your salary is given up in return for pension contributions. As your salary is reduced, this type of contribution attracts both income tax and NI relief. Your employer also has a NI saving and will often increase their contribution in line with this. The contributions are paid to the pension provider as gross employer contributions. Tax relief is given via the payroll and so no further relief is due via the tax return.
  • Net pay arrangement – the employee contribution reduces your earnings subject to income tax but, unlike salary sacrifice, there in no NI saving. The contributions are paid gross to the pension provider. Tax relief is given via the payroll and so no further relief is due via the tax return.
  • Relief at source – employee pension contributions are deducted from your net pay after tax and NI has been calculated. The net contributions are then paid to the pension provider, who will then reclaim 20% tax via the pension scheme. These types of contributions should be included on your tax return and depending on your level of income, higher or additional rate tax relief will be given via the tax return.  

If you are unsure what type of pension contributions you make, please get in touch, we will be happy to check this for you.