Increasing contributions to works pension for non tax payer

veryintrigued

Help me out folks.

A relative earns under £10k a year and, as such, pays no tax on their salary.

Would increasing their contributions (currently 5% employee) garner any relief?

The employer has already stated that the contributions can be increased to whatever percentage they wish but they (the company) won't increase their level from 3%.

Thanks in advance

Dazed_and_C0nfused

Not unless they have some other taxable income that it will impact.

xylophone

Does the pension scheme use "net pay" or "relief at source"?

If "relief at source" then she would receive tax relief even though she pays no tax.

https://www.linklaters.com/en/insights/publications/uk-pensions/2020/august/uk-pensions---relief-at-source-versus-net-pay

Marcon

veryintrigued said:

Help me out folks.

A relative earns under £10k a year and, as such, pays no tax on their salary.

Would increasing their contributions (currently 5% employer) garner any relief?

The employer has already stated that the contributions can be increased to whatever percentage they wish but they (the company) won't increase their level from 3%.

Thanks in advance

Suspect this should be '5% employee'. Yes, if your relative increases their contributions the pension provider will claim basic rate tax on their behalf and add it to the pot IF that is what happens with the current 5% contribution?

veryintrigued

Marcon said:

veryintrigued said:

Help me out folks.

A relative earns under £10k a year and, as such, pays no tax on their salary.

Would increasing their contributions (currently 5% employer) garner any relief?

The employer has already stated that the contributions can be increased to whatever percentage they wish but they (the company) won't increase their level from 3%.

Thanks in advance

Suspect this should be '5% employee'. 

Indeed - thanks it should have been 5% employee.

I'm hindering her currently not helping!

Dazed_and_C0nfused

xylophone said:

Does the pension scheme use "net pay" or "relief at source"?

If "relief at source" then she would receive tax relief even though she pays no tax.

https://www.linklaters.com/en/insights/publications/uk-pensions/2020/august/uk-pensions---relief-at-source-versus-net-pay

Good point, don't know why I was assuming net pay!

veryintrigued

Thanks folks.

I'll pass the goodness above on.

veryintrigued

So the relatives works pension has got back to her.

The contributions are deducted via net pay.

The business only uses relief at source, where salary sacrifice deduction is used, above a £21k threshold (which she's doesn't earn above).

So, if she did voluntary increase her own contributions, this would automatically increase the HMRCs contribution too then wouldnt it - even though she only earns < £10k and pays no tax.

Again sorry, in advance, for the daft question.

Albermarle

No .
For example is she earns £7K pa and £500 is taken form that as pension contributions from net pay . Then she gets £6500 in her take home pay and £500 in her pension, so no tax benefit .
If the payment was taken out after tax ( even though she does not actually pay any ) the £500 would attract £125 tax relief.
So in this case she should pay the minimum contribution needed to get the employers contribution . Any extra contributions should be made separately from 'after tax ' pay . Either directly into the workplace pension ( if allowed- it usually is ) or to a new pension ( can be set up in 10 mins online ) 

veryintrigued

Wow - thanks for that.

That sounds crackers that making a regular (additional) contribution via her small salary doesn't have the benefit that the same regular and additional contribution would have if she made it directly to the pension provider.

Below is the response from the company pension department (i.e. not the pension provider):

Your pension contributions are deducted from your NET pay, therefore the amount you pay is only 80% of the contribution. For example, if your contribution was £100, you would see a deduction on your payslip for £80.00.

The additional 20% is recovered from HMRC by the pension provider and invested into your plan so the full 100% of your contribution is invested.

Relief at Source is where contributions are deducted through salary sacrifice. As a business we only apply this to colleagues who earn over £21k per year.

Net pay schemes, which you contribute to, garner tax relief. The relief at source scheme do not, as the tax benefit is received at source.

Dazed_and_C0nfused

Relief at Source is where contributions are deducted through salary sacrifice

Not to everyone else there not!

Relief at source is what you intend to do (personal contribution to the workplace scheme a personal pension or SIPP).

Salary sacrifice is where you don't even contribute to a pension, the employer pays more in return for you accepting a lower salary.