Pension being deducted at NET (not gross!) by employer

ajl119

Hi,

So it’s a new tax year, and I decided to have a closer look at my auto-enrolled pension contributions setup by my employer.
And I was very surprised and concerned to discover that my pension is being deducted at NET, not GROSS and it should be.

This presents multiple issues;
1) Is this legal or in conflict with the government guidelines?
Deducting at NET means that the employers contribution is downsized from what it should be, and I cannot see this stated anywhere on my pension documents!
2) How can I reclaim the underpaid contribution by my employer?
3) How can I reclaim my overpaid Tax?

Thanks very much for your help.
Andy.

Lokolo

1) This is a standard way of pension contributions. When taking it from gross, this is called salary sacrifice.

2) N/A

3) By default, the pension scheme will top up your contribution by 25% to discount the 20% income tax effect. If you are a higher rate tax payer, then you should be doing a self assessment to reclaim.

cobson

There is information here about the different methods of tax relief and which schemes use which method:

https://www.thepensionsregulator.gov.uk/en/employers/managing-a-scheme/contributions-and-funding

wjr4

FYI the new tax year starts on 6th April, not 1st.

ajl119

Hi,
Thanks for quick replies.

1) Ok, every other employer I know/have worked for does it at Gross. So this is new.

"If you need to calculate tax on the pay that is left after you’ve paid into the pension, then the scheme uses net pay arrangements." - This is confusing, (net-pay-arrangements) implies deducted-at-gross as tax is calculated after pension deductions.

And "You can tell if it's relief at source if the pension provider has to claim the tax relief from HMRC." - This (relief-at-source) implies this is deducted at net and the HMRC (source) has to return the paid tax.

The options make sense, it just seems like the names are the wrong way around
But the effective staff contribution of each option should be roughly the same.

3) Ok thanks.

What I am struggling with, is I cannot see anywhere on the shared link (thanks) or elsewhere, which clarifies exactly what are the limits for "elements of staff pay are used to calculate pension contributions" should be?

Currently my employer is ducting my Income TAX and NIS. And then deducting my Pension contribution amount from the figure left after TAX deductions. And finally they are then basing their own contribution % figure as the percentage of what remains after all the above has been deducted. This doesn't seem right or fair?

Additionally, regardless of whether the deduction is made at either Net or Gross, should the actual amounts to be deducted, be calculated based on the percentage of the initial Gross or declining Net?
I.e. What figure (Gross, Post Tax Net, or Post Tax & Pension Net) should the percentages be applied against for the employee and the employer amounts?

It feels like they have chosen the scheme that allows them to make the very smallest contribution possible.

My past employers calculated both mine and their contributions from my Gross, and then deducted my contribution from my Gross. It wasn't a waterfall of deductions before their contribution so to speak?

Ahh 6th! Noted..

I hope this makes sense, thank you so much for all your help

greenglide

But with a Net Pay arrangement the tax relief is claimed back by the pension scheme and added to your pension account giving the same result as deducting the contributions from the net pay, unless you pay higher rate tax when you need to need to claim the extra relief from HMRC.


When you talk about "gross pay" you don't mean salary sacrifice do you? That is different as this reduces your salary while at the same time the employer makes employer contributions on your behalf. This is financially better for you and the employer but requires them to set the scheme up.

Linton

The pension scheme rules should state what is "pensionable pay" from which the %s are determined. Different schemes will have different rules.

MichelleUK

greenglide wrote: »

But with a Net Pay arrangement the tax relief is claimed back by the pension scheme and added to your pension account giving the same result as deducting the contributions from the net pay, unless you pay higher rate tax when you need to need to claim the extra relief from HMRC.

You are describing a 'relief at source' scheme. The 'Net Pay Arrangement' is where the pension is deducted from gross pay before tax. This is such a ridiculous name for the scheme, as most payslips state Net Pay as being take home pay; it is no wonder it is so confusing!

Marcon

Completely agree with you that the terminology re net/gross is totally confusing!

Minimum contributions under auto enrolment are well explained here (even if your employer is using a different pension scheme for their employees): https://www.nestpensions.org.uk/schemeweb/nest/employers/get-ready-for-auto-enrolment/contributions.html?logged=yes

hyubh

Lokolo wrote: »

This is a standard way of pension contributions. When taking it from gross, this is called salary sacrifice.

By the by, a net pay arrangement doesn't have to involve salary sacrifice. In fact, that's exactly what most public sector schemes do (i.e. they are net pay but not sal sac).

xylophone

Completely agree with you that the terminology re net/gross is totally confusing!

See this from The People's Pension...

https://thepeoplespension.co.uk/help/knowledgebase/are-the-contributions-paid-net-or-gross/

Are the contributions paid by ‘Relief at Source’ or ‘Net Pay Arrangement’?

When you set up your workplace pension with The People’s Pension, you can choose to deduct your employees’ contributions from their wages either before or after tax.

Tax relief can be applied in two very different ways (and it’s important to get it right):

Deducting employee contributions after tax? We call this the net tax basis. You may see HM Revenue & Customs (HMRC) referring to this as the ‘relief at source’ method. When you sign up to The People’s Pension, we’ll automatically set you up on the net tax basis



Deducting employee contributions before tax? We call this the gross tax basis. You may see HMRC referring to this as the ‘net pay arrangement’ method. If you choose this option, you’ll need to call us on 01293 586666 to set this up.