Why does relief at source pension include tax relief rather than extra?

maz_hartley

My pension is with nest and is relief at source. My contribution is 10% but it only works out that I pay 8% then the rest 2% tax relief. I understand how it’s worked out but I’m confused as to why with some pensions you’d get 10% + 20% tax relief yet with relief at source the tax relief is calculated as part of the 10% hence paying only 8% and the 2%. So why the difference unless I’m missing something. I don’t pay tax as I earn just under the tax threshold if that makes a difference?

Albermarle

In fact if you pay £100 then £25 tax relief gets added . That is because to get £100 after tax you actually have to earn £125.
If you pay £80 , then 25% also gets added on so you end up with £100 . So no difference.

I think what has happened in your case is the way your employer interprets what 10% contribution as and what you think it is , is different.
When you requested to pay 10% , your employer takes 8% from you and the tax relief makes it the 10% Gross you requested ( in their eyes) ,
If you wanted  to pay NET 10% then you will have to ask your employer to increase your contribution to 12.5% gross.
It probably was not explained to you properly, if at all, so an understandable confusion.

Marcon

maz_hartley said:

My pension is with nest and is relief at source. My contribution is 10% but it only works out that I pay 8% then the rest 2% tax relief. I understand how it’s worked out but I’m confused as to why with some pensions you’d get 10% + 20% tax relief yet with relief at source the tax relief is calculated as part of the 10% hence paying only 8% and the 2%. So why the difference unless I’m missing something. I don’t pay tax as I earn just under the tax threshold if that makes a difference?

It does with what is (confusingly) called the 'net pay' method, where the pension contribution is deducted from your salary before tax is deducted. If you don't pay tax in the first place, you normally 'miss out' on the tax break because your salary is already below the level at which tax starts to be paid.

Using round numbers for simplicity (and ignoring reality!), take an example where:

You earn £300 a week
You pay 10% gross to your pension (£30 week)

 Under the net pay arrangement, your employer would take £30 off your £300, meaning you pay tax on £270. Your tax saving is £30 x 20% = £6.

Under the relief at source method, your employer taxes you on £300 (tax paid £60). You contribute £24 to your pension and the pension provider claims basic rate tax on your behalf (£6) and adds it to your pot, thus grossing it up to £30.

Same tax relief, same amount paid as personal contribution to pension - IF you are a taxpayer. As mentioned above, if you don't earn enough to pay tax, you 'miss out' under the net pay arrangement. Happily you are in a relief at source scheme, so you get 'tax relief' even though you don't pay tax!

barnstar2077

My employer also does it this way.  It is weird to go from looking at a SIPP, where the tax relief is clearly added in later, to looking at my company pension.  As people often advise to put a certain percentage in depending on your age, I could see why some people might think they are doing better than they actually are.