The newsletter in November 2018 raised an important issue that may be simple for those that work in the pensions profession by is complex and confusing for consumers. More worryingly it appears that there are issue with some payroll departments who are processing pension payments and passing them to providers.
In the article in the newsletter HMRC say “We’re aware of issues with giving tax relief to scheme members on their pension contributions. As a result, some scheme members are receiving tax relief twice and others are not getting the tax relief they’re due.”
Ignoring the annual allowance because this is a separate test, an individual, aged under age 75, making a pension contribution will qualify to claim income tax relief in a tax year; the greater of:
- the ‘basic amount’ - currently £3,600, and
- the amount of the individual’s relevant UK earnings that are chargeable to income tax for that tax year.
That is the simple part, the next part is how it is paid, relief at source or net pay. This is where the confusion has crept in it would appear.
Net Pay Arrangement
Net pay arrangements are those that take pension contributions from the employee’s salary before it is taxed. This means that there is no need for the scheme to reclaim any tax and no need for the member to reclaim any additional or higher rate relief either. With a lot of press coverage at the moment about how bad this is for low earners it has brought the issue to the fore, which may be what is causing in over and under claims.
These schemes are Defined Benefit or Defined Contributions occupational pension schemes, but it is always worth checking. If a scheme is set up as a group personal pension then it is likely to be relief at source and auto enrolment schemes could be either.
Relief at source
Relief at source arrangements are usually personal pensions because there is no need for an employer. The pension scheme reclaims 20% tax, whatever the members actual tax rate. The member will then either reclaim their higher or additional rate tax through their self assessment, or by calling HMRC and having their tax code amended accordingly. The second option will give the tax relief sooner, HMRC need to be informed of the gross personal contributions paid to the scheme (net payment plus the 20% tax relief) to ensure the correct higher or additional rate is granted.
This should be a fairly easy to ascertain, but the terminology tends to be the part that causes confusion to the uninitiated. To me it has always seemed the wrong way round and I know what I am talking about.