Massive confusion: pension contribution "net pay" vs "relief at source"

Diesel3390

Hi,

I'm trying to wrap my head around EMPLOYER CONTRIBUTIONS when it comes to "net pay" vs "relief at source".

I can't figure out whether a, say for example, 3% employer contribution in net pay is the same as a 3% employer contribution in relief at source.

For example sake, let's say annual earnings before tax: £149K --> £12,400 gross (before tax etc)

Under "net pay" method: employer contribution = 3% x £12,400 = £372 a month

Under "relief at source" method: they seem to do it under "qualifying earnings", which is basically 3% of a certain band of earnings instead of on the full amount. Therefore in this scenario it is only about £110! 

That means under the "relief at source" method, I only get £110 from a 3% employer contribution instead of getting £372 a month from a 3% employer contribution in the "net pay" method.

Am I correct in how I have interpreted this? If so, am I correct that a 3% employer contribution in "relief at source" is less than a 3% employer contribution under "net pay"? Does the HMRC then "top it up" to bring the relief at source method to £372?

Dazed_and_C0nfused

Diesel3390 said:

Hi,

I'm trying to wrap my head around EMPLOYER CONTRIBUTIONS when it comes to "net pay" vs "relief at source".

I can't figure out whether a, say for example, 3% employer contribution in net pay is the same as a 3% employer contribution in relief at source.

For example sake, let's say annual earnings before tax: £149K --> £12,400 gross (before tax etc)

Under "net pay" method: employer contribution = 3% x £12,400 = £372 a month

Under "relief at source" method: they seem to do it under "qualifying earnings", which is basically 3% of a certain band of earnings instead of on the full amount. Therefore in this scenario it is only about £110! 

That means under the "relief at source" method, I only get £110 from a 3% employer contribution instead of getting £372 a month from a 3% employer contribution in the "net pay" method.

Am I correct in how I have interpreted this? If so, am I correct that a 3% employer contribution in "relief at source" is less than a 3% employer contribution under "net pay"? Does the HMRC then "top it up" to bring the relief at source method to £372?

Employer contributions are neither net pay or relief at source.

Employer contributions are always paid gross with no tax relief.  As only contributions made by the employee are eligible for tax relief

Diesel3390

Dazed_and_C0nfused said:

Diesel3390 said:

Hi,

I'm trying to wrap my head around EMPLOYER CONTRIBUTIONS when it comes to "net pay" vs "relief at source".

I can't figure out whether a, say for example, 3% employer contribution in net pay is the same as a 3% employer contribution in relief at source.

For example sake, let's say annual earnings before tax: £149K --> £12,400 gross (before tax etc)

Under "net pay" method: employer contribution = 3% x £12,400 = £372 a month

Under "relief at source" method: they seem to do it under "qualifying earnings", which is basically 3% of a certain band of earnings instead of on the full amount. Therefore in this scenario it is only about £110! 

That means under the "relief at source" method, I only get £110 from a 3% employer contribution instead of getting £372 a month from a 3% employer contribution in the "net pay" method.

Am I correct in how I have interpreted this? If so, am I correct that a 3% employer contribution in "relief at source" is less than a 3% employer contribution under "net pay"? Does the HMRC then "top it up" to bring the relief at source method to £372?

Employer contributions are neither net pay or relief at source.

Employer contributions are always paid gross with no tax relief.  As only contributions made by the employee are eligible for tax relief

Thanks. And noted on the part around only employee contributions are eligible for tax relief.
So then, am I correct that a 3% employer contribution in the "relief at source" is less than a 3% contribution under the "net pay".... because under net pay the employer does the 3% on the full earnings, whereas under "relief at source" the 3% is done only on a band/range isntead on the full amount.

So the employer contirubtion under "relief at source" would need to be more like 9% to match a 3% under net pay in order to get the actual £/$ the same.

Is that correct?

Dazed_and_C0nfused

Diesel3390 said:

Dazed_and_C0nfused said:

Diesel3390 said:

Hi,

I'm trying to wrap my head around EMPLOYER CONTRIBUTIONS when it comes to "net pay" vs "relief at source".

I can't figure out whether a, say for example, 3% employer contribution in net pay is the same as a 3% employer contribution in relief at source.

For example sake, let's say annual earnings before tax: £149K --> £12,400 gross (before tax etc)

Under "net pay" method: employer contribution = 3% x £12,400 = £372 a month

Under "relief at source" method: they seem to do it under "qualifying earnings", which is basically 3% of a certain band of earnings instead of on the full amount. Therefore in this scenario it is only about £110! 

That means under the "relief at source" method, I only get £110 from a 3% employer contribution instead of getting £372 a month from a 3% employer contribution in the "net pay" method.

Am I correct in how I have interpreted this? If so, am I correct that a 3% employer contribution in "relief at source" is less than a 3% employer contribution under "net pay"? Does the HMRC then "top it up" to bring the relief at source method to £372?

Employer contributions are neither net pay or relief at source.

Employer contributions are always paid gross with no tax relief.  As only contributions made by the employee are eligible for tax relief

Thanks. And noted on the part around only employee contributions are eligible for tax relief.
So then, am I correct that a 3% employer contribution in the "relief at source" is less than a 3% contribution under the "net pay".... because under net pay the employer does the 3% on the full earnings, whereas under "relief at source" the 3% is done only on a band/range isntead on the full amount.

So the employer contirubtion under "relief at source" would need to be more like 9% to match a 3% under net pay in order to get the actual £/$ the same.

Is that correct?

I honestly don't know what you're talking about.

When it comes to employer contributions 3% is 3%.

Are you getting mixed up with the auto enrolment earnings threshold 🤔

DRS1

3% of qualifying earnings sounds like the minimum employer contribution required under auto enrolment.

Diesel3390

Yes 3% is the minimum so I did it on that example.

What I mean is: 3% employer contribution under net pay method seems to yield more in actual £ number than 3% under the relief at source method.

I just need a yes or no here.

The reason being that under net pay, 3% is calculated on the entire gross earnings so if your entire gross earnings is £100 you get £3. But under relief at source, 3% isn't calculated on the entire £100, it's instead calculated on some threshold/band (let's pretend that band is £60 instead of a full £100).

All I need is a yes or no. The 3% aren't alike in terms of actual £ number that they translate into. Meaning that if two employers say they both contribute 3%, then the employer contributing under net pay method would be giving you more £ figure than the employer who says 3% contribution using the relief at source method.

Is that correct?

DRS1

Diesel3390 said:

Yes 3% is the minimum so I did it on that example.

What I mean is: 3% employer contribution under net pay method seems to yield more in actual £ number than 3% under the relief at source method.

I just need a yes or no here.

The reason being that under net pay, 3% is calculated on the entire gross earnings so if your entire gross earnings is £100 you get £3. But under relief at source, 3% isn't calculated on the entire £100, it's instead calculated on some threshold/band (let's pretend that band is £60 instead of a full £100).

All I need is a yes or no. The 3% aren't alike in terms of actual £ number that they translate into. Meaning that if two employers say they both contribute 3%, then the employer contributing under net pay method would be giving you more £ figure than the employer who says 3% contribution using the relief at source method.

Is that correct?

I think you are confusing two different things.  How much an employer contributes is up to the employer.  There is a minimum but an employer can choose to contribute more.  In your example one employer has decided to contribute more than the other.

Net Pay and Relief at Source have nothing to do with that.  They only relate to employee contributions and how the tax relief works for those contributions..

Dazed_and_C0nfused

Diesel3390 said:

Yes 3% is the minimum so I did it on that example.

What I mean is: 3% employer contribution under net pay method seems to yield more in actual £ number than 3% under the relief at source method.

I just need a yes or no here.

The reason being that under net pay, 3% is calculated on the entire gross earnings so if your entire gross earnings is £100 you get £3. But under relief at source, 3% isn't calculated on the entire £100, it's instead calculated on some threshold/band (let's pretend that band is £60 instead of a full £100).

All I need is a yes or no. The 3% aren't alike in terms of actual £ number that they translate into. Meaning that if two employers say they both contribute 3%, then the employer contributing under net pay method would be giving you more £ figure than the employer who says 3% contribution using the relief at source method.

Is that correct?

There is no yes or no answer because employers do not use either of those methods to add money to a pension.  They are methods used by the employee.  Non earners would use relief at source.

3% from an employer is 3%, nothing more to it than that.

What they base the 3% on is a different question.  But it has got nothing whatsoever to do with the "net pay" or "relief at source" methods.

Diesel3390

Dazed_and_C0nfused said:

Diesel3390 said:

Yes 3% is the minimum so I did it on that example.

What I mean is: 3% employer contribution under net pay method seems to yield more in actual £ number than 3% under the relief at source method.

I just need a yes or no here.

The reason being that under net pay, 3% is calculated on the entire gross earnings so if your entire gross earnings is £100 you get £3. But under relief at source, 3% isn't calculated on the entire £100, it's instead calculated on some threshold/band (let's pretend that band is £60 instead of a full £100).

All I need is a yes or no. The 3% aren't alike in terms of actual £ number that they translate into. Meaning that if two employers say they both contribute 3%, then the employer contributing under net pay method would be giving you more £ figure than the employer who says 3% contribution using the relief at source method.

Is that correct?

There is no yes or no answer because employers do not use either of those methods to add money to a pension.  They are methods used by the employee.  Non earners would use relief at source.

3% from an employer is 3%, nothing more to it than that.

What they base the 3% on is a different question.  But it has got nothing whatsoever to do with the "net pay" or "relief at source" methods.

I'm not a pension expert so forgive me if I haven't explained it properly. But as far as I understand, it DOES absolutely have a link to net pay or relief at source methods.

Let me explain another way.

Let's pretend I have the option of joining two companies. Both say they will match contribution. So "if you contribute 3% then we will also match and contribute 3%".

Lelts say for simplicity I earn £100 a month. Nice round figure.

Under net pay, my employer matches my 3% and also gives 3% to my pension... So that is 3% of £100 = £3.

But under relief at source method, the 3% isn't calculated on the entire £100 earnings, it's instead on pensionable earnings which is kinda like a high and low band -- suppose it's £60. So 3% of £60 is £1.8

So in this scenario, both employers are telling me they match 3% contribution,.but the employer who chooses the net pay method gives the employee more actual £.

Employers have to choose which method they do pensions under, so it DOES matter whether it's net pay or relief at source.

This is what I want to validate.

Not all 3%s (i.e. employer matching contribution) look the same in terms of actual hard £.

Can you validate I'm correct?

hugheskevi

Diesel3390 said:

Dazed_and_C0nfused said:

Diesel3390 said:

Yes 3% is the minimum so I did it on that example.

What I mean is: 3% employer contribution under net pay method seems to yield more in actual £ number than 3% under the relief at source method.

I just need a yes or no here.

The reason being that under net pay, 3% is calculated on the entire gross earnings so if your entire gross earnings is £100 you get £3. But under relief at source, 3% isn't calculated on the entire £100, it's instead calculated on some threshold/band (let's pretend that band is £60 instead of a full £100).

All I need is a yes or no. The 3% aren't alike in terms of actual £ number that they translate into. Meaning that if two employers say they both contribute 3%, then the employer contributing under net pay method would be giving you more £ figure than the employer who says 3% contribution using the relief at source method.

Is that correct?

There is no yes or no answer because employers do not use either of those methods to add money to a pension.  They are methods used by the employee.  Non earners would use relief at source.

3% from an employer is 3%, nothing more to it than that.

What they base the 3% on is a different question.  But it has got nothing whatsoever to do with the "net pay" or "relief at source" methods.

I'm not a pension expert so forgive me if I haven't explained it properly. But as far as I understand, it DOES absolutely have a link to net pay or relief at source methods.

It doesn't.

As you have been told several times by someone who is a pension (and tax) expert.

Using the £100 of qualifying earnings example:

• The employer contributes the 3% statutory minimum, £3
• The employee component can be paid in one of 3 ways: Salary sacrifice (employee salary reduced by £5, employer contribution of £5 made to pension), Net Pay (taxable earnings reduced by £5 which goes into the pension) or relief at source (£4 deducted from net income, grossed up by provider to £5). 

DRS1

But the question is beginning to make a bit more sense - as it is about matching the employee contribution (let's put aside the fact that under auto enrolment the employee has to pay 5% not 3%).

What you should be saying to these prospective employers is that their "matching" contribution has be based on your full salary - or put it the other way don't take the job with the penny pinchers.

But just to say what has been said before - relief at source has nothing to do with qualifying earnings.