Workplace pensions and tax relief
There are two types of tax relief paid into workplace pensions: the ‘net pay arrangement’ and ‘relief at source’. Find out how this affects what you see on your payslip, and when you need to take action to get full tax relief.
Tax relief
Your employer has to contribute if you're in a workplace pension and earn over £6,240 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.
Your workplace pension includes:
- your contribution
- your employer’s contribution
- the government’s contribution as tax relief
The net pay arrangement
Your employer takes your pension contribution and the government’s contribution as tax relief from your pay before deducting tax. You pay tax on what's left.
Under this arrangement if you don’t pay tax, you don’t get tax relief, for example because you earn less than the tax threshold.
Relief at source
Your employer takes your pension contribution from your pay after deducting tax (and National Insurance contributions). Your pension scheme provider then claims the tax back from the government at the basic rate of 20 per cent. This is added to your pension.
What you see on your payslip
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 sees on his monthly payslip is £100. This is his contribution plus the government’s contribution. Tom is a basic rate tax payer (20 per cent), this means the £100 comprises:
- Tom's contribution of £80
- the government’s contribution of £20
If you earn just over the tax threshold, the amount of tax relief you get might not equal 20 per cent shown in Tom’s example.
The current tax threshold is available on the GOV.UK website:
Basic rate tax payer
If you’re a basic rate taxpayer, you get full tax relief automatically.
Higher or additional rate tax payer
If you’re a higher or additional rate taxpayer, to get full tax relief you need to claim back tax on your annual tax return. If you are a higher rate tax payer you can also contact HM Revenue & Customs.
Not a tax payer
If you don’t pay income tax because you're on a low income, you automatically get tax relief. To find out the rate and how much of your pension contribution it applies to, visit the following page on GOV.UK.
What you see on your payslip (‘relief at source’)
If your workplace pension scheme uses a ‘relief at source’ arrangement, the pension contribution figure 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. The pension scheme provider claims £20 from the government and pays it into Jane's 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.
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’. It includes contributions from your employer.
Find out more about the current annual allowance for tax relief at the link below:
Earnings
The earnings figures £6,240 and £10,000 are valid during the 2022-2023 tax year.