When choosing a pension scheme for automatic enrolment, employers may consider the way the tax relief is applied, and best suits their employee's circumstances.
Relief at source (RAS)
Pension contributions are taken after tax is deducted and can sometimes be referred to as net tax basis. The pension scheme will be the one that claims the 20% tax relief back from HMRC and adds it to the employee's pension pot.
When the scheme is an RAS, higher and additional rate taxpayers will need to claim back the full tax by completing a self-assessment.
Net pay arrangements (NPA)
Pension contributions are deducted before tax is calculated and can sometimes be referred to as gross tax basis. This means that the employee is getting full tax relief on their contributions and the pension scheme does not need to reclaim any tax.
If employees don't pay income tax, then they will not get any tax relief unless they are enrolled on a relief at source scheme.
How do I know which tax relief method my pension uses?
The pension scheme should tell you if they are going to reclaim tax from HMRC. If tax is calculated after the pension contributions have been deducted, then this is a net pay arrangement scheme.
Common Schemes and tax relief
Relief at source | Net pay arrangements |
|---|---|
The People's Pension is a relief at source scheme by default but employers can choose to set it up as an NPA.
There are many pension schemes not listed and there may also be different ways to manage a scheme. If you are not sure how the scheme is set up, the pension provider should be able to explain how the scheme should be run.
Salary Sacrifice
Some employers choose to set up a salary sacrifice scheme. This is a different type and more information on setting up the scheme in Shape can be found here: Salary Sacrifice Pension Scheme.
How does Shape support Relief at source and Net pay?
Relief at source
If your pension scheme is a relief at source like NEST or The People's Pension, you should put in the full contributions for the employer and the employee. These schemes are set up in Shape as Relief at source by default.
Example
If the employer contributes 3% and the employee is 5%, then this should be entered into Shape showing the full contribution expected. Shape will calculate the correct percentage to take from the employee and report the correct deduction type to HMRC so that the pension provider can reclaim the 20% tax relief from HMRC.
Net pay arrangement
If the pension scheme is a net pay arrangement, then when setting up the scheme, tick the box to make sure the pension contributions are deducted correctly and submitted to HMRC in the correct way.
Further Guidance
The Pensions Regulator - What to look for in a Pension Scheme