Net pay pension - worth putting more in?

michyt123

I have moved job from where I was part of a salary sacrifice scheme to a net tax basis pension scheme in my new job.  I used to contribute extra in my old job to save tax/NI but wondering if i contribute more here will I get any tax advantage (will the government contribute a higher amount)?  

BoGoF

Just to clarify, is your pension deduction taken from pre or post tax pay? Are you a higher rate taxpayer?

Pat38493

Normally Net pay deduction means that your contributions are sent to the pension provider before tax is deducted, but from your own pay rather than being an employer contribution.

It is almost always beneficial to pay more money into the pension regardless of the method - the disadvantage of net pay will be that you will not avoid some of your national insurance payment, but it will still be worth it for the tax benefits alone.

oliver1951

I’m not as current on pension schemes as I once was. However it seems to me that the two descriptions you give represent the same type of pension deduction. All employee pension contributions to HMRC approved schemes ( which almost all employer schemes are) are deducted from gross pay before tax comp. Ie you do not pay any tax on the value of your pension contribution. However what does matter is the type of pension scheme, whether it is a defined contribution scheme or a defined benefit scheme. A defined contribution scheme, as its name implies says how much you contribute, but benefits will depend on how the investments grow, they are also more flexible but can also be harder to manage in the long term. The defined benefits pension can be calculated in a number of ways, final salary, career averages etc. It’s important to know which type of scheme you are going into. It’s also important to know what type of scheme you were in previously and whether you can ( if you wanted to) bring your old pension into your new scheme. Your company ought to be able to provide some advice and as a minimum they should have supplied you with details of your pension scheme.

Albermarle

All employee pension contributions to HMRC approved schemes ( which almost all employer schemes are) are deducted from gross pay before tax comp. Ie you do not pay any tax on the value of your pension contribution.

Not correct I am afraid.

Many workplace pension contributions are 'Relief at Source' schemes. Despite its rather confusing name, it means that contributions are taken from after tax salary. The pension provider automatically adds basic rate tax relief and if you are a higher rate taxpayer, you have to get back any higher rate relief due from HMRC.

This is also how it works if you add money personally to a non workplace pension.

oliver1951

How relief at source works

Relief at source is a way of giving tax relief on contributions a member makes to their pension scheme. Members will get tax relief, based on their residency status, at the relevant basic rate that applies in the UK, Scotland or Wales. The amount paid to the scheme is treated as having had an amount equal to basic rate tax deducted.

The scheme administrator claims the basic rate tax relief from HMRC and adds it to the pension pot. This applies if the member pays tax or not.

For example, if the relevant basic rate was 20%, and a member wants to make a £100 contribution they’ll only need to pay £80 into their pension scheme. The scheme administrator reclaims £20 from HMRC and puts this into the scheme making up the pension contribution to £100.

xylophone

to a net tax basis pension scheme in my new job

Just to clarify, do you understand the difference between  " Net Pay" and "Relief at Source"?

Which system is being used by  your new employer?

If "net pay" your contributions are taken from your salary before you pay tax - thus in effect you are receiving all the tax relief to which you are entitled.

If "relief at source" your contributions are take from your salary after tax - the pension provider receives your contribution and then claims basic rate relief which will be added to your pension.

if you are a higher rate tax payer , you will need to contact HMRC to claim higher rate relief.

https://forums.moneysavingexpert.com/discussion/6475912/relief-at-source

Albermarle

oliver1951 said:

How relief at source works

Relief at source is a way of giving tax relief on contributions a member makes to their pension scheme. Members will get tax relief, based on their residency status, at the relevant basic rate that applies in the UK, Scotland or Wales. The amount paid to the scheme is treated as having had an amount equal to basic rate tax deducted.

The scheme administrator claims the basic rate tax relief from HMRC and adds it to the pension pot. This applies if the member pays tax or not.

For example, if the relevant basic rate was 20%, and a member wants to make a £100 contribution they’ll only need to pay £80 into their pension scheme. The scheme administrator reclaims £20 from HMRC and puts this into the scheme making up the pension contribution to £100.

Thanks for confirming what I said, that with Relief at Source schemes, pension contributions ae taken from your taxed pay and the tax relief is added later.
This is different from a Net pay scheme, or salary sacrifice, where you never pay the tax on the contributions in the first place. 

Dazed_and_C0nfused

oliver1951 said:

I’m not as current on pension schemes as I once was. However it seems to me that the two descriptions you give represent the same type of pension deduction. All employee pension contributions to HMRC approved schemes ( which almost all employer schemes are) are deducted from gross pay before tax comp. Ie you do not pay any tax on the value of your pension contribution. However what does matter is the type of pension scheme, whether it is a defined contribution scheme or a defined benefit scheme. A defined contribution scheme, as its name implies says how much you contribute, but benefits will depend on how the investments grow, they are also more flexible but can also be harder to manage in the long term. The defined benefits pension can be calculated in a number of ways, final salary, career averages etc. It’s important to know which type of scheme you are going into. It’s also important to know what type of scheme you were in previously and whether you can ( if you wanted to) bring your old pension into your new scheme. Your company ought to be able to provide some advice and as a minimum they should have supplied you with details of your pension scheme.

Pretty sure you have that the wrong way round nowadays.

Most employee contributions will be made using the relief at source method.  Which doesn't reduce your taxable income but has 25% added by the pension provider.

Net pay might be common in the public sector and NHS but not many auto enrolment schemes seem to use it.

xylophone

I had a thought - there is some scope for confusion in terminology in 

https://thepeoplespension.co.uk/pension-tax/#pension-tax-when-paying-in

It seems that PP call RAS "the NET TAX basis"

while  NET PAY is termed "GROSS TAX basis".

Ask your employer whether your pension contributions are taken before or after your earnings are taxed.

Is net pay before or after tax?

‘Net pay’ means the amount you’re paid after tax has been taken.

That’s why we call it a ‘net tax basis’ when we take pension contributions after tax – because that would mean we’d be taking your contributions from your ‘net pay’.

Your ‘gross pay’ is the amount you’re paid before tax is taken.

So when we take pension contributions before tax, we call it ‘gross tax basis’ – because that would mean we’d be taking your contributions from your ‘gross pay’.

The OP referred to "net tax basis" - if he is in PP then he is on RAS and if a higher rate tax payer, will need to claim higher rate relief through HMRC.

Marcon

oliver1951 said:

I’m not as current on pension schemes as I once was. However it seems to me that the two descriptions you give represent the same type of pension deduction. All employee pension contributions to HMRC approved schemes ( which almost all employer schemes are) are deducted from gross pay before tax comp. Ie you do not pay any tax on the value of your pension contribution. 

Might be better not to post if you aren't sure of your facts - pensions are an ever-changing scenario! 

Most schemes these days are relief at source, so contributions are made from post-tax pay, with the provider claiming basic rate tax relief and adding it to the individual's 'pot'. Higher rate tax relief (if applicable) has to be claimed by the individual.

You are describing the net pay arrangement, whereby personal contributions are deducted from gross pay.

There are circumstances where pension contributions can be subject to tax (eg where the annual allowance has been exceeded and there is no carry forward available).