PTM044230 - Contributions: tax relief for members: methods: net pay
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Net pay arrangements
Schemes that can use net pay arrangements
Individuals that can make contributions under net pay arrangements
Net pay arrangements
Tax relief on pension contributions when the employer is operating the net pay arrangement
If the employer is operating the net pay arrangement then pension contributions will be by means of payroll deduction. The member’s employers will deduct the contribution from the ‘gross pay’ in the tax year the contribution is made. The employer is able to operate ‘PAYE’ on the net amount giving full relief at the marginal tax rate. Once relief is given on a contribution through this arrangement, relief will not be given on the contribution under any other provision to avoid a double deduction of tax relief.
Full tax relief is received up front with this method. Here the contribution is deducted from a member’s pay but before tax has been deducted. If the contribution is £100, £100 will be deducted from the member’s pay and paid into the pension scheme. As the contribution is taken from the member’s pay before tax is calculated they have effectively been given full tax relief.
What a member should do if they believe that they were not given all of the relief that was due
There may be instances where insufficient relief has been given through the net pay arrangement because:
- the amount of contributions paid by an individual under one or more relevant net pay pension schemes in a tax year exceeds the employment income from the individual’s employment or employments with the sponsoring employer or employers for the tax year, or
- it is not possible for the sponsoring employer or employers to deduct the whole amount of the contribution from the individual’s employment income
In these circumstances an individual should make a claim to obtain full tax relief on the contribution. This should, if possible be made via a self-assessment return. See the section on making a claim for relief at PTM044240 for more details about how to do this.
Net pay arrangements when the member is no longer an employee
If any non-current-employee members are contributing to the scheme the employer will not be able to use the net pay arrangement for them. They may then make a claim under the self-assessment system without there being any impact on employee members.
Schemes that can use net pay arrangements
A registered pension scheme can only accept contributions that have been relieved through net pay arrangement in 2 situations. These are:
Situation 1 - occupational pension schemes
Section 191(3) Finance Act 2004
Net pay arrangements may be used if all the following criteria are met:
- the pension scheme is an occupational pension scheme, and
- the member is an employee of a sponsoring employer of the pension scheme, and
- all the other contributing scheme members who are employees of the same employer are also receiving tax relief under the net pay arrangement.
Situation 2
Section 191(4) and (8) Finance Act 2004
Net pay arrangements may be used if the following criteria are met:
- the pension scheme is a public service pension scheme (such as the Principal Civil Service Pensions Scheme or the Local Government Pension Scheme) or is a marine pilots’ benefit fund, and
- the member is an employee.
A marine pilots’ benefit fund is:
- a fund established under section 15(1)(i) of the Pilotage Act 1983, or
- any scheme supplementing or replacing such a fund.
Individuals that can make contributions under net pay arrangements
Only an individual entitled to tax relief who is:
- both a member of an occupational pension scheme and an employee of a sponsoring employer for that scheme, or
- an employee member of a public service pension scheme, or
- an employee member of the marine pilot’s benefit fund
may have their relievable pension contributions relieved through the net pay arrangement.
If a third party makes a relievable pension contribution in respect of a member the contribution cannot be paid via the net pay arrangement. Tax relief will be available to the member but by way of a claim - generally through the Self-Assessment system.
Where relief is given on relievable pension contributions through the net pay arrangement, relief may not be given by any other method.
A scheme member can only pay contributions to an occupational pension scheme under the net pay arrangement if all the other members who are employees of their employer are also making contributions under the net pay arrangement. An employer cannot choose to let one group of employees in a scheme pay contributions under net pay and another group pay contributions under relief at source.