Net Pay Workplace Pension
Many workplace pensions are set up on a ‘Net Pay Arrangement’ basis. This means that your own regular pension contributions are deducted from your pension before any taxation. You then pay income taxes on the net amount i.e. you pay lower taxes on your pay and this is how you achieve tax relief on you pension.
E.g. Your earn £2,000pm. You pay £200pm into your workplace pension and your employer also pays in £200pm. Your pay before tax is £1,800 i.e. you pau income taxes based upon earnings of £1,800 that month and not £2,000. £400 gross contributions (£200 employee + £200 employer) are sent to your pension. As your pension scheme is set up a Net Pay, the pension provider treats all the contributions as gross contributions.
If you elect to pay an additional £1,000 ‘one off’ into your Net Pay pension, the pension company will usually still assume this as a gross contribution i.e. no tax relief and will simply add £1,000 to your pension account. You will need to contact HMRC or complete a self assessment tax return to get the tax relief due. This will be refunded at 20% if you are a basic rate tax payer and 40% or 45% if you are a higher rate or additional rate tax payer.
If you have a private or personal pension, you always pay net pension contributions and tax relief is added. Although any employer contributions are gross.
E.g. You pay in £160pm net into your pension and your employer pays gross £200pm into your private pension. Your pension company will automatically add 20% tax relief your own pension contribution, in this case, automatically making £160pm up to £200pm plus £200pm employer contributions = £400pm gross. The same result as the above net pay arrangement.
If you again elect to pay an additional £1,000 ‘one off’ into your private pension, you actually send £800, which your pension company will automatically add tax relief to the contribution to make it up to £1,000 ‘one off’ lump sum payment. The net result is the same as the above but you will not need to contact HMRC or complete a self assessment return for basic rate tax relief. If you are a higher rate or additional rate tax payer you should still complete a self assessment tax return to claim the additional 20% or 25% tax relief.
This is the difference between making additional voluntary contributions to a net pay workplace pension arrangement or a private pension scheme.