Could I be receiving the wrong pension tax relief?

Recent concerns have highlighted the importance of ensuring workplace pension contributions are processed correctly. A mismatch between a pension scheme's tax relief method and the way payroll is set up could result in employees receiving more tax relief than they are entitled to, potentially leading to unexpected tax bills if HMRC identifies the error.

How Pension Tax Relief Works

There are two main methods used to provide tax relief on employee pension contributions:

Relief at Source (RAS)

Employee contributions are deducted from pay after income tax has been calculated. The pension provider then claims basic rate tax relief from HMRC and adds it to the employee's pension pot. Higher and additional rate taxpayers can claim any further tax relief through their Self Assessment tax return or by contacting HMRC.

Net Pay Arrangement (NPA)

Employee pension contributions are deducted from gross pay before income tax is calculated. This means tax relief is given automatically through the payroll, so there is no need for the pension provider to reclaim basic rate tax relief.

Where Problems Can Arise

Payroll systems must apply the correct tax treatment for the type of pension scheme being used. Problems occur when these methods are confused.

For example, if a pension scheme operates on a Relief at Source basis but payroll mistakenly treats it as a Net Pay Arrangement, the employee may receive tax relief through payroll while the pension provider also claims basic rate relief from HMRC. This effectively gives tax relief twice on the same pension contribution.

Although the mistake may go unnoticed initially, HMRC could later identify the issue and seek to recover the excess tax relief. Correcting the error can also involve time-consuming payroll adjustments and additional administration for employers.

What Employers Should Do

Now is a good time to review your workplace pension arrangements and payroll processes to ensure they are aligned. In particular, employers should check that:

the payroll software is configured for the correct type of pension scheme;

payroll and pension provider records are consistent;

any changes to pension arrangements have been reflected in payroll settings; and

historic payroll records are reviewed if there is any concern that contributions may have been processed incorrectly.

We're Here to Help

Pension payroll errors can remain undetected for some time, making them more difficult to correct later. A simple review now could help avoid unnecessary tax complications for both employers and employees.

If you would like us to review your payroll processes or discuss whether your workplace pension scheme is being operated correctly, please get in touch with our payroll manager anne@shepherdpartnership.com, who will be happy to help.