In the August 2023, the HMRC are again reminding employers on the confusing pension scheme tax relief methods along with a warning that the employer is responsible for any resulting underpayment of tax.
So PAYadvice.UK goes through their detail published and attempts to clarify and explain.
The bulletin states:
Tax relief on employee contributions to registered pension schemes
There are 2 main methods for employers to use to get tax relief on employee pension contributions.
HMRC has found some employers are making mistakes, which may be because of the names given to each method.
These methods are known as:
- net pay
- relief at source
PAYadvice comment- no wonder, the terminology is backwards. The net pay (NPA) scheme has little to nothing to do with net pay or contributions from net pay and confuses many employers and even their pension providers. Contributions are from gross!
And with Relief At Source, payroll wise there is no tax relief!
It would be better to refer to Pre-Tax and Post-Tax (before and after)
For a net pay arrangement, the employer will deduct the pension contribution upon which relief is due from an employee’s gross income before operating PAYE. The employee will then get tax relief at their marginal rate of income tax without needing to make any additional claim.
PAYadvice comment – well that’s as clear as mud and using the term Net Pay Arrangement really confuses. Why not refer to Pre-Tax or before tax.
Relief at source
The employer will deduct an amount from net pay (after tax and National Insurance deductions) equal to the pension contribution net of basic rate tax relief.
PAYadvice comment – well now HMRC confuse further by referencing Net Pay in a different and opposite manner to NPA, thats helpful!
And although it implies the contribution is reduced by the equivalent of basic rate tax, that is not how all RAS contributions are calculated on payroll, especially as there is actually no tax relief applied. The pension scheme will claim a 25% top-up of employee contributions received.
The scheme provider will claim the basic rate tax equivalent from HMRC Pension Scheme Services (PSS) and top up the individual’s pension pot by the amount claimed from PSS.
In relief at source arrangements the individual will need to claim any higher or additional rate tax relief from HMRC against their tax code or Self Assessment.
PAYadvice comment – well that makes things simple, or not! There will be many who do not realise that they can claim tax back. This is confusing in that the contributions are for the pension, yet these additional amounts are not paid to the pension.
For example, using English tax rates, a member who wishes to make a relievable pension contribution of £100 actually contributes £80 via deduction by the employer from their net pay. That £80 is passed on by the employer to the pension scheme provider. The pension scheme provider then claims the basic rate tax relief due of £20 from HMRC PSS which is added by the provider to the pension pot of the individual.
The individual cannot choose the method of relief for themselves. The default for all new registered pension schemes has been relief at source since April 2006. However, an employer can elect at the start of a new pension scheme to operate net pay as long as that scheme meets certain conditions. Once registered, the form of tax relief is set.
Examples of common mistakes
This could be when an employer makes the mistake of reporting a relief at source scheme through RTI in the data fields for a net pay scheme. This results in providing tax relief through payroll incorrectly, in addition to the tax relief correctly provided via the pension scheme provider and HMRC PSS. The excess relief provided is an employer payroll failure, and the employer is liable for the tax under deducted and remitted to HMRC.
PAYadvice comment – this is where a sizeable number of employers are facing what could end up as significant financial risk. The HMRC terminology is backwards or opposite to what the terms used would mean in common language and many schemes ‘get it wrong’. Where an employer set their scheme in payroll wrong, HMRC are indicating that any underpayment of tax due to double reliefs being applied will sit with the employer!
Any employer reporting pension contributions as net pay through RTI should check with their scheme provider on how the scheme is registered. If pension contributions have been reported through RTI incorrectly they should correct this immediately.
PAYadvice comment – some of the pension providers have limited to no knowledge of payroll and how contributions are to be set up, often confusion on the correct setting originates with some pension providers as they also can be confused by tax relief terms.
Any errors identified from previous periods should be reported through the HMRC digital disclosure facility.
If you are a Large Business with a Customer Compliance Manager (CCM), you should report this through direct engagement with your CCM.
Another example could be when many businesses have adopted salary sacrifice arrangements linked to pension contributions. In such cases the employee ceases to make employee contributions, but contractually sacrifices a similar proportion of earnings in favour of an additional employer contribution to their pension. Effectively, to an outcome of relief via payroll similar to a net pay arrangement.
PAYadvice comment – Salary Sacrifice resources are available on PAYadvice. They are often misunderstood by employers and even payroll professionals for the reasons HMRC outline. There is no employee pension contribution with salary sacrifice and added obligations on the employer during period of paid parental leave.
Every employer provides a report of employee and employer pension contributions to their pension scheme provider. If they accidently report additional employer contributions linked to a salary sacrifice as employee contributions, then the relief at sourcescheme provider will claim further undue relief from HMRC PSS. In these cases, even though the employer provided an inaccurate report to the pension scheme provider, the pension scheme provider is deemed legally responsible for the over claimed relief under Reg 10(5) of registered pension schemes (Relief At Source) regulations 2005 (SI3448 of 2005).
The employer must inform the pension scheme provider that their reports have been inaccurate, and the pension scheme provider must contact HMRC PSS if they have claimed too much Relief At Source for pension scheme members.
So hopefully everything is clarified and the tens of thousands of employers who are applying reliefs incorrectly will get it right next week!
So Net is not really net but gross! So a pre-tax or before contribution
Relief At Source is actually no tax relief in payroll – it’s all handled by the pension provider, so payroll wise a post or after tax contribution. Some operations in payroll may apply a theoretical basic rate reduction, some wont as there is actually no relief in the payroll calculation. And then higher rate tax payers and many Scots (as rates can be more than the rest of the UK) need to claim extra tax back.
And salary sacrifice removes employee contributions and turns then into employer contributions with associated obligations.