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

Marcon

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?

Not necessarily. I think where your confusion might still be creeping in, despite the helpful answers already given, is that the penny hasn't quite dropped that employers can choose whether to pay contributions based on full pay, OR on 'qualifying earnings'. Whether it's net pay or RAS doesn't matter.

NEST has a good explanation of this: https://www.nestpensions.org.uk/schemeweb/helpcentre/contributions/calculating-contributions/calculate-contributions-using-qualifying-earnings.html

hugheskevi

DRS1 said:

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.

It is probably helpful to recap statutory minimum contributions, which is 3% employer and 5% employee on qualifying earnings between £6,240 and £50,270. Employers are free to have different contribution rates in excess of these if they wish, and can determine those rates however they wish (including 8% employer, 0% employee) as long as 8% of qualifying earnings go into the member's pension pot and at least 3 percentage points come from the employer.

That gives a maximum statutory minimum gross employee contribution of £2,201.50 for someone with qualifying earnings at or above £50,270 p/a at an employer operating statutory minimum contribution levels.

• That could be paid by salary sacrifice, reducing the employee salary by £2,201.50 and paying an employer contribution of that value into the pension.

• If paid by net pay it would be deducted from gross pay, giving a lower taxable income on which PAYE is operated.

• If paid by relief at source a deduction of £1,761.20 would be made from take-home pay and the pension provider would gross up to £2,201.50.

Under all three methods the employee contribution is 5% (albeit technically 0% under salary sacrifice) and I would be surprised if an employer had a policy to match the £1,761.20 net relief-at-source contribution (so effectively 4% of qualifying earnings) rather than the gross contribution of £2,201.50 (5% of qualifying earnings). But that would be down to whatever an employer's matching policy is, and what exactly they match (which is likely to be a % of salary, up to a limit) not anything inherent with net pay or relief at source.

GunJack

Ahhh....yes it's beginning to make more sense now, and I think the confusion may be down to the fact that some employees based their, say, 5% on full salary, and others do it on qualifying earnings which start after the first £6,240 of gross earnings. OP, is this what you're getting at??

https://www.gov.uk/workplace-pensions/what-you-your-employer-and-the-government-pay

QrizB

Diesel3390 said:

Can you validate I'm correct?

Sorry, you're still wrong.

Diesel3390 said:

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 £1.80

Whether "net pay" or "relief at source", the auto-enrollment minimum is for the employer to pay 3% of qualifying earnings. There is discretion as to how the employer calculates quaifying earnings (whether it includes bonuses, for example); and as a minimum, however, they have to pay 3% on qualifying earnings between £6,240 to £50,270.

But this is not a "net pay" vs. "relief at source" difference. Either method of payment can be minimised in the same way by a cheapskate employer.

Edit: I was typing this while hugheskevi and GunJack were writing their posts. I think we all agree!

Marcon

What's the betting OP has been in a defined benefit scheme with contributions based on full pay/made under the net pay arrangement, and then joined an employer who has a defined contribution scheme where contributions are based on qualifying earnings with contributions made under relief at source?

OP, does that ring true?