Increasing contributions to works pension for non tax payer

Albermarle

veryintrigued said:

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.

Your employer is mixing up the terms and seems confused .
To be fair the correct description of the different ways of contributing to a pension seem almost designed to confuse .
https://thepeoplespension.co.uk/help/knowledgebase/whats-a-net-pay-arrangement/
https://thepeoplespension.co.uk/help/knowledgebase/whats-relief-at-source/

veryintrigued

Albermarle said:

veryintrigued said:

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.

Your employer is mixing up the terms and seems confused .
To be fair the correct description of the different ways of contributing to a pension seem almost designed to confuse .
https://thepeoplespension.co.uk/help/knowledgebase/whats-a-net-pay-arrangement/
https://thepeoplespension.co.uk/help/knowledgebase/whats-relief-at-source/

Appreciate those links.

No wonder my relative is so confused if her company are giving this sort of information.

So the question still stands - will increasing her contributions direct with the pension company (if she finds out this method is possible) would give the tax relief?

xylophone

Wow - thanks for that.

Mystified by the reply received.

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

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.

See also

https://www.litrg.org.uk/sites/default/files/190509-LITRG-briefing-Net-Pay-Arrangements-lower-paid-workers-FINAL.pdf

And salary sacrifice  - see https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/salary-sacrifice

In the above the whole contribution is regarded as an employer's contribution and so tax relief is not given - the advantage to the employee is that he pays less tax because his salary is lower and may benefit from the NI saving, but of course for the low paid employee who does not earn enough to pay  tax or NI there is nothing to be gained.

When an employee who does not earn enough to pay tax is in a net pay scheme, his contribution (let's say £100 for example) is taken from his salary and  added to his pension.

In  a relief at source scheme, £80 would be taken from his salary and paid over to the scheme and the provider would claim £20 from HMRC and add it to his pension.

Dazed_and_C0nfused

veryintrigued said:

Albermarle said:

veryintrigued said:

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.

Your employer is mixing up the terms and seems confused .
To be fair the correct description of the different ways of contributing to a pension seem almost designed to confuse .
https://thepeoplespension.co.uk/help/knowledgebase/whats-a-net-pay-arrangement/
https://thepeoplespension.co.uk/help/knowledgebase/whats-relief-at-source/

Appreciate those links.

No wonder my relative is so confused if her company are giving this sort of information.

So the question still stands - will increasing her contributions direct with the pension company (if she finds out this method is possible) would give the tax relief?

I think you need to clarify the situation with the employer, that is the only way of being certain you get the desired outcome.

veryintrigued

Dazed_and_C0nfused said:

veryintrigued said:

Albermarle said:

veryintrigued said:

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.

Your employer is mixing up the terms and seems confused .
To be fair the correct description of the different ways of contributing to a pension seem almost designed to confuse .
https://thepeoplespension.co.uk/help/knowledgebase/whats-a-net-pay-arrangement/
https://thepeoplespension.co.uk/help/knowledgebase/whats-relief-at-source/

Appreciate those links.

No wonder my relative is so confused if her company are giving this sort of information.

So the question still stands - will increasing her contributions direct with the pension company (if she finds out this method is possible) would give the tax relief?

I think you need to clarify the situation with the employer, that is the only way of being certain you get the desired outcome.

I agree.

She does.

But she is having the difficulties as above when engaging with them directly.

veryintrigued

xylophone said:

Wow - thanks for that.

Mystified by the reply received.

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

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.

See also

https://www.litrg.org.uk/sites/default/files/190509-LITRG-briefing-Net-Pay-Arrangements-lower-paid-workers-FINAL.pdf

And salary sacrifice  - see https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/salary-sacrifice

In the above the whole contribution is regarded as an employer's contribution and so tax relief is not given - the advantage to the employee is that he pays less tax because his salary is lower and may benefit from the NI saving, but of course for the low paid employee who does not earn enough to pay  tax or NI there is nothing to be gained.

When an employee who does not earn enough to pay tax is in a net pay scheme, his contribution (let's say £100 for example) is taken from his salary and  added to his pension.

In  a relief at source scheme, £80 would be taken from his salary and paid over to the scheme and the provider would claim £20 from HMRC and add it to his pension.

Thanks again xylophone.

Hopefully, with the replies on here, I'll be able to direct her to ask for clarification with her company pension reps.

Dazed_and_C0nfused

One thing you could do is check her payslips.

Net pay would look like this,
Monthly Salary £800
Pension contribution £40
Taxable pay £760
NIC'able pay £800

veryintrigued

Dazed_and_C0nfused said:

One thing you could do is check her payslips.

Net pay would look like this,
Monthly Salary £800 £816
Pension contribution £40 *
Taxable pay £760 £816
NIC'able pay £800 £816
* Employer 8.88
   Employee 11.84

Also a small amount (£2.89) of NI

So from this it appears:
- This may not be a net pay scheme.
- The £8.88 makes sense ((816 x 12) - (6240)) x (0.03/12) for the 3% from the employer.
- The £11.84 I'm bamboozled with as being the 5% pension contribution from her.

veryintrigued

So hopefully getting somewhere from the response below:

The ‘relief at source’ is what we refer to as a net pay arrangement as the pension contribution is taken after tax and national insurance (therefore taken from your net pay). This does give the 20% tax relief as explained in my email below. This is the scheme you are enrolled onto.

Does this:
a) Make more sense?
b) Mean that if she were to make increased contributions, direct from her salary, that these additional payments would also give the 20% tax relief?

Please say yes. She thought I was the half clever one in the family!

Dazed_and_C0nfused

The good news is that that it does indeed appear to be relief at source.
If she simply increased her % then I see no reason why the same system wouldn't apply.

The bad news is that her employer is using the annual auto enrolment earnings threshold of £6,240 before calculating the 5%.

£816 - £520 = £296
£296 x 5% = £14.80
£14.80 less 20% tax relief = £11.84.

Her £11.84 should get £2.96 added by the pension company making a pension fund of £14.80.

Assuming the employer won't change use of the earnings threshold (it isn't mandatory) then you (she) should factor that into any proposed increase.

https://www.moneyadviceservice.org.uk/en/articles/automatic-enrolment-if-you-earn-up-to-10000