pension contribution being offset by tax relief

intex

Hi All,

I have started a new job and I have advised my payroll department that I would like to pay 16% of my salary into my pension.

I was expecting my monthly contribution to be calculated as follows :-

£2500 (monthly salary)
- £512 (lower earnings)
= £1988
*0.16 (16%)
= £318.08 (my personal monthly contribution)

The pension provider is also expecting to receive roughly this amount. They have sent me a letter that says the following about what they are expecting my monthly contribution to be, and I quote :-

"Total new monthly contribution: £475.00
Made up of
Your contributions: £320.00 (16% of your salary when tax relief is included)
Your tax relief: £80.00
Your employer's contributions £75.00 (3.00% of your salary)"

So far so good. However, my Payroll department are calculating my contribution like this :-

£2500 (monthly salary)
- £512 (lower earnings)
= £1988
*0.16 (16%)
= £318.08
*0.20 (20% tax relief)
=£63.62
Then
£318.08
-£63.62
=£254.46 (my personal monthly contribution)

This results in my monthly contribution being £254.46 instead of £318.08. This is a large difference, and it means my pension projections are wrong with my pension provider, as they are expecting to receive roughly £320.00, and this is what they base the projections on.

I have checked how my contributions were calculated by my previous employer and they were calculated the same as I expect. I have also checked how my wifes contributions are calculated and again they are calculated how I would expect.

1. Why is my current employer different and offseting my contribution with 20% tax relief? As a further clarification I am not saying I am not receiving 20% tax relief, I am just objecting to having my personal monthly contribution reduced because of it.
2. Is it legal to calculate the contribution this way?
3. Is it 'normal' to calculate it this way?
4. It seems to me that this way of calculating the contribution will result in people underpaying into their pensions by a significant amount? Which surely is unfair?
5. Can I legally request that my payroll department calculate my contribution the way I want them to? i.e. without offseting it with 20% tax relief (so I pay £318.08 instead of £254.46, I would still obviously benefit from the tax relief being paid into my pension, and would also benefit in the sense that I would pay in more)

Thanks in advance for any help that you may be able to provide. I have found the whole process very confusing so far.

Dazed_and_confused

Unlikely but is it possible that the pension provider is operating a "relief at source" scheme but this particular employer is operating "net pay".

Not sure that is the problem but not something that's been posted here before I don't think. Odd.

Dazed_and_confused

On second thoughts the pension provider is calculating things on a pensionable salary of £2,500.

Your employer is calculating it on s pensionable salary of £1,988

tacpot12

1. It is just how they do it.
2. Yes
3. Yes, In my experience, it is always done this way.
4. I don't agree. At my last employer, I notionally contributed 16% of my salary to my pension and my employer paid 8%. Because they applied the contribution net of the tax relief, I was only paying 12.8% of my take-home pay into the pension and the government was paying the other 3.2%. The net result was that 24% of my salary was paid into my pension which is what I wanted.
5. No. You can't force them to change their system, nor can you force them to take more out of your salary than their system or their policies allow. HMRC may allow you to pay 100% of your earned income into a pension, but your employer doesn't have to provide a way to do this.

Just as them to pay £397.6 into your pension, if their policy allows this, they will do the calculation that their system normally does and arrive at a contribution from your taxed pay of £318.08.

If your employer doesn't provide a way to make all the pension contributions you want to, start a SIPP.

Lorian

Increase your contribution to 19% ?

squirrelpie

Exactly. It doesn't really matter how they base the calculation, just use the same basis as they do when you tell them how much you want to contribute.

bowlhead99

intex wrote: »

Hi All,

I have started a new job and I have advised my payroll department that I would like to pay 16% of my salary into my pension.

Unfortunately it seems the employer has substituted 'salary' with 'pensionable pay' as presumably they do not want to base their own minimum level of contributions on your full salary, and they have assumed that you do not either, as it makes the admin easier for them if everyone is working on the same basic figures.

Therefore they are calculating your 16% on the [£2500-512] instead of the full £2500, where 512 is the lower earnings limit below which they don't have to pay contributions (if their scheme is using a definition of pensionable pay as the salary over that limit).

In my own workplace, the 512 has never had anything to do with the calculation whatsoever, as the employer has chosen to give us 5% on our total salary (excluding overtime or bonuses) as an employer contribution, and does not care that a theoretical lower limit exists which some companies might choose to use. We just use total salary and if I want to give up 10% of my own total salary in exchange for pension contributions I will simply tell them 10% is the number, and everything runs off total salary.

In your case, you wanted to give up 16% of your total salary (£400pm gross) but they have deducted 16% of your [salary less lower earnings limit] and so it is not as much money as you wanted to contribute. The solution for you is just to ask them to increase your contribution rate a bit - perhaps to 20%, 25% , 17.549743%, whatever you prefer.

1. Why is my current employer different and offseting my contribution with 20% tax relief? As a further clarification I am not saying I am not receiving 20% tax relief, I am just objecting to having my personal monthly contribution reduced because of it.

As you have noted, you are receiving the tax relief on the amount you pay, but the thing that is perhaps confusing you is that the £512 'lower earnings limit' is coincidentally very similar to 20% of your total pay.

It is the fact that they are only applying the 16% contribution by you (and probably the 3% contribution by them) to the earnings between £512 and £2500 which is resulting in your contributions being lower than you had expected them to be, because the pensions are being paid on £1988 instead of on £2500.

This means that you are paying £318 gross a month. If they had instead calculated it on your full salary (instead of the full salary reduced by the lower earnings limit) you would have paid £400 a month gross which is £320 net. The £320 net under that scenario is coincidentally quite similar to the 318 gross under your scenario, but it doesn't mean you have been diddled out of any tax relief, it just means they are not using your full salary as the pensionable pay on which they calculate their (and your) contributions.

2. Is it legal to calculate the contribution this way?

As you don't seem to have been diddled out of any money, but are simply contributing less than you would like (318 gross instead of 400 gross), there doesn't seem to be anything illegal happening. If you would prefer to contribute more, the solution is to just ask to contribute more.

3. Is it 'normal' to calculate it this way?

In some workplaces people are reluctant to make contributions at all and employers do not want to have the burden of paying high pension percentages on full salary when their employees won't appreciate that the employer is going above and beyond the bare minimum. They would prefer to give employees something that more employees would be grateful for, like a higher headline salary or comfier chairs.

So in some workplaces, reference to 'percent of salary' in the pension documentation means 'percent of pensionable salary' which might be a lower number than actual salary. If you want to put a large amount of money into your pension, you might have to ask for a larger percentage of 'pensionable salary' than you would have asked for if everyone in the HR and finance department was using 'total salary' when referring to amounts going into the pension.

4. It seems to me that this way of calculating the contribution will result in people underpaying into their pensions by a significant amount? Which surely is unfair?

It is not 'unfair' if people see exactly what is being put into their pension each month and do not choose to put more money into it.

There is no law or golden rule which says that "16% of total salary, and not 16% of the salary in excess an arbitrary £512 per month lower limit, is the exact right amount for an individual to be paying into their pension". For some people £100 a month might be right, although it won't buy much in retirement. For others, £300. For others, £500. For others, £1000. The amount you should contribute depends on what you want to have built up in your retirement pot by the time you are ready to retire, so it depends on how much you want, how much you already have, and how much time you have got left to make contributions and how much time you have got for your pension funds to grow.

So there is no real risk of people 'underpaying into their pensions by a significant amount'. The employee is allowing you to make contributions by asking what percentage to put in, because perhaps employees find it easier to think of it in terms of a percentage of earnings or percentage of pensionable earnings instead of an actual cash amount. A good reason for doing that is if they get a pay rise the contributions at x% of pensionable pay will rise too - whereas if employees asked to contribute a specific amount of money like £100 a month or £318 a month or whatever, it would not go up as they progressed through the company and got inflationary payrises etc.

But ultimately the contribution does work out as an actual cash amount and you can see how much it is. In your case if it is only £318 gross instead of £400 gross, ask to put more in.

5. Can I legally request that my payroll department calculate my contribution the way I want them to? i.e. without offseting it with 20% tax relief (so I pay £318.08 instead of £254.46, I would still obviously benefit from the tax relief being paid into my pension, and would also benefit in the sense that I would pay in more)

It is not illegal for you to request them to pay on your behalf whatever you would like them to pay on your behalf (£1000 gross, 400 gross, £398 gross, £320 net, £318.08 net, £200 net, whatever). But depending on the scheme they may have some arbitrary rule which says they won't accept processing pension deductions of more than x% pensionable pay. In which case you could always contribute to a separate private scheme.

However, it seems like you would get approximately the result you want if you simply ask to contribute 20% of pensionable pay into the scheme, then they will do 20% of (2500-512) which is about £398 gross and it will cost you about £318 net. Or tell them you want to contribute 16% of Total pay not 16% of [total pay less lower earnings limit], in which case it would be £400 gross and £320 net.

Either way if you are correctly getting tax relief on whatever you are putting in, and the employer is complying with his own scheme rules (even if those rules allow him to pay £60 instead of £75 for his "3%" contribution), then there doesn't seem to be a need for you to be bandying around accusations of illegality.

intex

bowlhead99 wrote: »

The £320 net under that scenario is coincidentally quite similar to the 318 gross under your scenario

Thanks for your very detailed answer, it has really helped. As you point out, I think the quote above is the crux of it and the major source of all my confusion.

penners324

Looks to me like you're expecting 2 lots of tax relief on your salary.
You've shown gross salary and the deduction required, your employer will then show the deduction post tax on your pay slip and send that to the pension company, with your pension company then adding the tax back onto the pot.

If your employer paid the amount you expect which is the gross amount and your pension company adds tax into you'll be getting double taxation relief.

HMRC would through a hissy fit at you and your employer for doing that.