Understanding tax relief on pension contributions

ForestBluebells

I currently pay into my workplace pension at the standard auto enrolment rate, I pay 5% and my employer pays 3%. A lot less is getting paid into my pension than I would expect looking at a tax calculation website so I’m confused. 

I earn £39,000, the tax calculator comes out that 5% should mean I pay £162.50 in my pension each month with £40.62 from HMRC, but that’s not what’s shown on my payslip.  I paid £150.56 into my pension this month and I had an extra £273.05 bonus this month so I would have expected to pay even more into my pension. Why is it so much less than the calculators show?

also where does the tax relief amount show as I don’t see any additional amounts other than my salary deduction and my employer contributions going into my pension pot. I’m sure I’m just misunderstanding how it works but the calculator makes it look like I should have £203.13 from my contributions/tax relief going in every month plus my employers contributions (does this also benefit from tax relief?)

can someone please help me understand what I should be expecting please?

JoeCrystal

It might be due to qualifying earnings which is between £6,136 and £50,000 for this tax year.  So £150.56 looks right.

If you take off £6,136 off £39,000 which is £32,864 divide it by 12 so it is £2738.66, add on your bonus, which adds up to £3,011.71, so 5% of that is £150.58 so your employee contribution is correct.

I know, it is annoying to be an employee whose employer decided to go for the cheapest pension provision possible.  

As for tax relief, it depends if your scheme is a relief at source or net pay. In a net-pay scheme, contributions are deducted from pay before any tax is applied, whereas, with relief at source scheme, the employee receives basic rate tax relief at source when they pay their net pension contribution

ForestBluebells

I’ve not heard of qualifying earnings before, how come all the calculators get it wrong then as they all show the higher contributions plus the tax relief on top? 😩 it’s so confusing. 

JoeCrystal

Because most calculators do not take into account minimum auto-enrollment sadly. I can only think of one, which does:
https://www.thesalarycalculator.co.uk/ so give that a go. This calculator does have an option of selecting auto-enrollment. 
It may be confusing, but the onus is on you to understand how it works! At least you are asking questions which will help to clear up your confusion.  

ForestBluebells

I’ve read up on qualifying earnings and I now understand why my contributions are lower than expected 😩 basically my employer has chosen the cheapest legal pension provision possible which makes sense as I wouldn’t expect them to be generous. It perhaps means my pension forecast is even lower than I expected though 😞 I’m trying to fill a LISA on top of my workplace pension which is a lot of money each month but I’m trying. 

I’m not sure I understand the tax relief part yet but but essentially I don’t get any additional money paid into my pension from tax relief and it just means I didn’t pay tax on that £150 a month. 

Andrew31

I dont know many companies that use this method, but yeh must be great to work for a company that squeezes every penny out of you. 

You can always top your share up if you want to. 

coyrls

Not paying tax on the £150 is your tax relief.  You are making contributions out of pre-tax income, if your income had been taxed prior to making a contribution, you would get the tax relief paid into your pension.

ForestBluebells

Thank you, that really helps, I understand now.  Also that calculator you linked works perfectly. I’ll use that one going forwards. So I’m actually NOT truly contributing 5% as it’s only 5% of qualifying earnings 🤦‍♀️ So I need to make up extra shortfall on contributions. I’m currently paying all my bonus money that I receive after tax plus all money I earn from my 2nd freelance job after tax provisions into a LISA plus £100 monthly direct debit into it but maybe I need to find more it’s very confusing trying to work out how much you need to save. 

ForestBluebells

Andrew31 said:

I dont know many companies that use this method, but yeh must be great to work for a company that squeezes every penny out of you. 

You can always top your share up if you want to. 

I know, now I realise this is what’s happening I’m not surprised as my employer is tight and it does make me a little sad but hey ho.   I don’t want to pay more into my workplace scheme as I don’t like the choice of investments there and I can pay less fees setting up my own pension provision outside of my workplace pension so I’ll try find spare cash to put into my own SIPP/LISA. I’m currently paying roughly £420 a month into my own pension plan outside of work. I’ll have an extra £150 a month spare from April so maybe all of that needs to go in too. It just seems like such a huge amount to have to pay in to a pension but I don’t want to fall
short of contributions. 

JoeCrystal

I can understand that! I usually do a pension calculator and work out the ideal contribution rate (which is at eye-watering 25% atm) on my birthday for a goal on SPA for the rest of the year. It is worth using https://www.hl.co.uk/pensions/pension-calculator.

Just bear in mind that the pension forecast on the annual pension statement is very pessimistic and often assume you would go for an annuity which at the moment is not that cost-effective compared to drawdown.

A great thing in your favour is your high salary would is going to be very helpful in term of saving up for the retirement.

You can also use this board as a sounding board if your assumptions are realistic as well.

ForestBluebells

I got a 2nd freelance job purely to enable me to start paying more into pension plans, I earn roughly £322 a month on my freelance job of which I’ll pay £258 into my LISA to account to account for tax (although I won’t have to pay tax on the first £1000 using the traders allowance I believe but I’ll keep it aside anyway just in case). I get the LISA top up anyway so that boosts my contributions and I’m paying £100 a month into there also (once my LISA is full I’ll be opening a SIPP), then if I pay all my bonus money in there too I’m hoping that’s enough but as my bonus varies every month it’s hard to calculate that, roughly £100-200 a month. I know I might not always have my freelance job so won’t have that contribution boost forever then I’ll have to try find an alternative 🙈