Online Government Tax calculator giving me wrong information (i think?)

singhini

NOTE TO MYSELF:

The three methods—Relief at Source, Net Pay, and Salary Sacrifice—are ways to contribute to your pension, and they differ mainly in how tax relief is given and how your take-home pay is affected.

Here’s a breakdown of each:

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1. Relief at Source

How it works:

• You contribute from your net (after-tax) salary.

• Your pension provider adds basic rate tax relief (currently 20%) to your contribution.

• If you're a higher-rate or additional-rate taxpayer, you must claim extra tax relief yourself through a Self Assessment tax return or by contacting HMRC.

Example:

• You want £100 to go into your pension.

• You pay £80 from your net pay.

• HMRC adds £20 (basic rate tax relief).

• If you're a 40% taxpayer, you can claim back an additional £20 via Self Assessment.

Who uses it:

• Common in personal pensions and some group personal pensions.

• Often used when your employer doesn’t operate a Net Pay or Salary Sacrifice scheme.

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2. Net Pay Arrangement

How it works:

• Your pension contribution is taken before income tax is calculated (but after National Insurance).

• You get full tax relief automatically, no matter your tax rate.

• Your take-home pay is reduced, but so is your taxable income.

Example:

• You earn £2,000/month and want to contribute £100.

• The £100 is deducted before tax is calculated, so you pay tax on £1,900.

• No need to claim any tax relief—you already paid less tax.

Who uses it:

• Common in occupational pension schemes.

• More beneficial for higher-rate taxpayers because tax relief is automatic.

Important note:

• Low earners (below personal allowance threshold) may not benefit from any tax relief in a net pay scheme, which is a drawback.

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3. Salary Sacrifice (also called Salary Exchange)

How it works:

• You agree to reduce your salary, and your employer pays that amount into your pension.

• Since your salary is lower, you pay less tax and less National Insurance (NI).

• Employer also saves on NI, and some pass this on to you as extra pension contributions.

Example:

• You earn £2,000/month and agree to sacrifice £100 into your pension.

• Your new salary is £1,900.

• No tax or NI is paid on the £100.

• Employer may also contribute the NI saving (13.8%) into your pension.

Who uses it:

• Employers offering more efficient pension schemes.

• Most tax-efficient for both employee and employer.

Downsides:

• Lower salary could affect things like:

  • Mortgage applications

  • Statutory pay (e.g., maternity/paternity)

  • Life cover based on salary

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Quick Comparison Table:

Feature	Relief at Source	Net Pay	Salary Sacrifice
Contribution from	Net pay	Gross pay	Reduced gross pay
Tax relief	Basic rate added automatically; higher rate claimed separately	Full tax relief at source	Full tax and NI savings
Affects NI	No	No	Yes (NI savings)
Higher-rate taxpayer benefit	Must claim extra manually	Automatic	Automatic
Best for low earners	✅	❌ (may miss out on tax relief)	✅ (if employer passes on NI saving)
Admin complexity	Low	Low	Higher (needs employer agreement)

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Which is best?

• Salary Sacrifice: Most tax-efficient if your employer offers it.

• Net Pay: Great for higher earners in workplace schemes.

• Relief at Source: Works well if you're not in a company scheme, or if you're a basic-rate taxpayer.

Isthisforreal99

But also note that you cannot salary sacrifice below minimum wage all of which was explaines in your previous post - https://forums.moneysavingexpert.com/discussion/6555763/salary-sacrifice-and-staying-above-national-minimum-wage/p2

singhini

Isthisforreal99 said:

But also note that you cannot salary sacrifice below minimum wage all of which was explaines in your previous post - https://forums.moneysavingexpert.com/discussion/6555763/salary-sacrifice-and-staying-above-national-minimum-wage/p2

Yes thanks for that.
I also don't earn £20k (i was just playing around with the Gov website)