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Key points

  • There are two tax relief arrangements that may apply to member contributions – 'net pay arrangement' and 'relief at source'.
  • These arrangements may affect higher and lower paid scheme members in different ways.
  • The tax relief arrangement may affect how much it costs a member to contribute.
  • We expect you to provide members with clear, accurate and relevant information about how they’re affected and whether they need to take any action.
  • We expect you to review your tax relief communications and improve them if they don't meet the needs of all members.

Tax relief arrangements

There are two ways that members may receive tax relief on their pension contributions.

  1. Net pay arrangement: the employer takes members' contributions from their pay before it's taxed. Members only pay tax on what's left. This means members get full tax relief unless they don't pay tax, eg because they earn less than the starting rate for income tax.
  2. Relief at source: the employer takes members' contributions after taking tax from their pay. The pension provider then adds tax relief of 20% to members’ pension pots. Members who pay higher rates of tax may need to claim money back via their Self Assessment tax return.

Under a net pay arrangement, lower paid workers earning less than £11,000 from 6 April 2016 may be disadvantaged as they won't receive tax relief on their contributions as their earnings are below the starting rate for income tax. This doesn't affect the amount of money that goes into the pension scheme, but will impact their take-home pay compared to a scheme using relief at source.

For example, under a net pay arrangement, a member who earns £10,400 (£200 a week) and pays a contribution of 1% will have the full £2 a week deducted from their pay and paid into their pension. They cannot claim any money back from HMRC and will have less take home pay.

Under a relief at source arrangement, the same member would have a contribution of £1.60 a week deducted from their pay and paid into their pension. The scheme would then claim £0.40 from HMRC so that a total of £2 a week is paid into their pension.

If an employer uses salary sacrifice to manage pension contributions, their lower paid staff won't get tax relief regardless of the tax relief method the scheme uses.

What to communicate to members

We expect you to ensure your communications are always clear on tax relief and that the same level of contribution is paid into the scheme and, as appropriate, members also benefit from an employer contribution.

You may need to provide specific information for lower paid workers if your scheme uses net pay arrangement or higher paid workers (those who pay higher rate tax) if your scheme uses relief at source.

If you’re providing standard letters for employers to use for their staff when carrying out their automatic enrolment duties, see our letter templates. However, as trustees you need to review whether to provide more detailed information on tax relief to members in your communications, eg member booklets. You may want to use the example wording below. If you’re uncertain about the wording you should use, you should consult with your professional advisers.

Lower paid members in a net pay arrangement

If your scheme uses net pay arrangement, clearly communicate to lower paid members that they don’t qualify for tax relief as their earnings are below the annual income tax personal allowance.

Example wording

When paying into a pension scheme, members may receive tax relief on contributions they make. This means that money that would have gone to the government as tax goes into an individuals’ pension instead.

Your pension contribution is deducted from your pay before tax is calculated. As your earnings are below the starting rate for income tax you do not benefit from the tax relief a taxpayer would receive.

However, this doesn’t affect the amount that is paid into your pension and you’ll continue to benefit from the money that your employer pays in. 

Higher paid members in a relief at source arrangement

If your scheme uses a relief at source arrangement, clearly communicate to the higher paid members who are subject to higher rate tax that basic rate tax relief is claimed back for them automatically through the scheme. However, they need to complete a Self Assessment tax return to claim back their full tax relief.

Example wording

When paying into a pension scheme, members may receive tax relief on contributions they make. This means that money that would have gone to the government as tax goes into an individuals’ pension instead.

Your pension contribution is deducted after tax is calculated on your pay. The scheme then claims tax relief at 20% on your contribution which is added to your pension. However, as you pay a higher rate of tax on some of your earnings you may be entitled to further tax relief.

To claim any money you’re still due, you need to complete a Self Assessment tax return and submit it to HMRC. For more information, see www.gov.uk/self-assessment-tax-returns.

Review and improve your tax relief communications

We expect you to review member communications regularly to ensure that they are clear, accurate and meet the needs of all members. Ensure that key messages are prominent and accessible to members.

Your review should include:

  • member booklets
  • website and intranet content
  • letters to members when they join or leave a scheme
  • information provided to prospective members
  • annual statements
  • communications provided by the trustees for employers to use

Where you’re not satisfied that your communications are clear or prominent enough, you should take urgent action to improve them. You need to provide accurate information to new and existing members. You should also consider whether to tailor your communications to meet the differing needs of the scheme membership profile.

We’re telling employers that lower paid workers will not benefit from tax relief if they choose a scheme operating a net pay arrangement. When reviewing your communications you may find it useful to refer our employer guidance on what to look for in a pension scheme.

Master trusts

If your scheme is a master trust you also need to review the material which you provide for use by participating employers to ensure that the tax relief arrangements are clearly communicated to members.

If your master trust is on the list of schemes that have achieved master trust assurance we expect you to review your communications to members, including material you provide for use by participating employers, to ensure that you continue to be accurate and clear about how tax relief is given.

The criteria to remain and be included on our list of schemes that have achieved master trust assurance will include that all member communications are clear, accurate and prominent about tax relief arrangements. We’ll review member communications as part of the process for joining and leaving our list.

Detailed guidance

For detailed guidance on communicating information effectively, go to the communicating and reporting guide.
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