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Tax relief

Unlike other ways of saving, a workplace pension means you aren’t the only one putting money in. Your employer has to contribute too, as long as you earn over £5,564 a year.

Most people also get a contribution from the government in the form of tax relief. This means some of your money that would have gone to the government as income tax, goes into your pension instead.

Therefore, going into your workplace pension will be:

• your contribution
• your employer’s contribution
• the government’s contribution (in the form of tax relief)
  

Relief under the ‘net pay arrangement’ or ‘relief at source’

There are two possible ways the government’s contribution (tax relief) can be paid into your pension. Which one your workplace pension scheme uses affects what you see on your payslip. And if you are a higher or additional rate tax payer, it also determines whether you need to take action to claim full tax relief.

Check with your employer to find out which one they use.

The Net pay arrangement

Your employer takes your pension contribution and the government’s contribution from your pay before taking off tax (but not National Insurance contributions). You only pay tax on what's left.

This means whether you pay tax at the basic, higher or additional rate you get full tax relief straightaway. You don’t need to do anything to make it happen; it happens automatically.

If you don’t pay tax, you don’t get a contribution to your workplace pension from the government (in the form of tax relief).

What you see on your payslip (the ‘net pay arrangement’)

The figure you see on your payslip is your contribution plus the government’s contribution (in the form of tax relief) added together.

For example:

Tom’s workplace pension scheme uses the ‘net pay arrangement’. He is paid monthly.

The pension contribution figure he can see on his monthly payslip is £100. This is his contribution plus the government’s contribution added together. Tom is a basic rate tax payer (20 per cent), this means the £100 is made up of:

• his own contribution of £80
• the government’s contribution of £20

Please note:

If you earn just over the tax threshold, the amount of tax relief you get might not equal 20 per cent. As shown in the ‘Tom’ example.

The tax threshold is currently £8,105 a year.

Relief at source

Your employer takes your pension contribution from your pay after taking off tax (and National Insurance contributions). Whoever runs your pension scheme then claims the tax back from the government at the basic rate of 20 per cent. This is then put into your pension.

Basic rate tax payer

If you’re a basic rate taxpayer, you don’t need to do anything to make this happen. You get full tax relief automatically.

Higher or additional rate tax payer

If you’re a higher or additional rate tax payer, to get full tax relief you need to claim the difference on your annual tax return. Alternatively, if you are a higher rate tax payer you can contact HM Revenue & Customs.

• Contact HM Revenue & Customs Opens new window

Not a tax payer

If you don’t pay income tax you still get tax relief on the first £2,880 you pay into your pension. This means, for example, if you pay in £2,880 during 2012-13, the government will also put in £720 (making a total of £3,600). If you pay in more, you don’t get tax relief on your contributions above £2,880.

What you see on your payslip (‘relief at source’)

If your workplace pension scheme uses a ‘relief at source’ arrangement, the pension contribution figure you see on your payslip is just your contribution. It does not include the government’s contribution.

For example:

Jane’s workplace pension scheme uses ‘relief at source’. She is paid monthly.

The pension contribution figure she can see on her monthly payslip is £80. This £80 is just her contribution. It does not include the government’s contribution. Whoever runs her pension scheme then claims £20 from the government and pays it into her pension. This means her contribution plus the government’s contribution adds up to £100 a month.

If you are not sure what rate of income tax you pay (basic, higher or additional), see the following link.

• HMRC information on Income Tax rates and taxable bands Opens new window

Annual Allowance

You can get tax relief on what you pay in, up to 100 per cent of your earnings (as long as you’re under 75).

However, if in any one year you have built up more than a certain amount in your pension, you may have to pay a tax charge. The amount is called the ‘annual allowance’ and for 2012-13 it is £50,000. It includes contributions from your employer.

The tax charge is called the ‘annual allowance charge’.

• HMRC information on the annual allowance Opens new window

A note about the earnings figures

Please note the earnings figures listed above (£8,105 a year and £5,564 a year) are for 2012-13. They may change each April. If they do, this web page will be updated.

More useful links

• Employer and government payments to workplace pensions

• HMRC information on Income Tax rates and taxable bands Opens new window