Workplace Pensions: Understanding Tax Relief and Scheme Types

Workplace pensions remain one of the most tax-efficient ways to save for retirement — but the amount of tax relief you receive depends on how your pension scheme is set up. Whether you're a business owner or an employee, it’s important to understand the difference between Net Pay Arrangements and Relief at Source, especially as new rules from the 2024/25 tax year aim to address a long-standing gap for lower earners.

Net Pay Arrangement

In a Net Pay Arrangement, your pension contributions are deducted before tax is calculated. This reduces your taxable income, so you automatically receive tax relief at your highest marginal rate — whether that’s 20%, 40%, or 45% (or in some cases as high as 60%).

• Higher earners benefit most from this arrangement.

• Historically, low-income workers (those earning below the personal allowance, £12,570 for 2025/26) did not receive any tax relief under this method, because they did not pay tax to begin with.  However, this is being addressed. From the 2024/25 tax year onwards, low-income earners in net pay arrangements will be eligible to receive a top-up payment from HMRC, putting them on a more equal footing with those contributing via Relief at Source schemes.  We understand that HMRC will contact those affected in 2026.

Relief at Source

In a Relief at Source scheme, 80% of the contributions are taken from your pay after tax, with your pension provider adding the remaining 20% via tax relief directly to your pension pot. If you pay tax at a higher or additional rate, you can claim the rest via self-assessment or by contacting HMRC.

• Low earners benefit from this model, as they still receive 20% tax relief even if they don’t pay tax.

• Higher earners must take an extra step to claim full relief.

Why does it matter which scheme I am in?

Understanding your scheme type is essential to ensure you do not miss out on valuable tax relief:

• If you're a higher-rate taxpayer in a Relief at Source scheme, you may be entitled to extra relief — but you must claim it.

• If you're a low-income saver in a Net Pay Arrangement, you may start receiving HMRC top-ups from 2026 for contributions made from April 2024 onwards.

A Note on Inheritance Tax

Looking further ahead, it's worth noting that from April 2027, some pension death benefits may become subject to inheritance tax. While this doesn’t affect current tax relief or contribution rules, it could have implications for future estate planning — particularly for those with larger pension pots.

How We Can Help

We offer a comprehensive PAYE service, including support with workplace pension auto-enrolment compliance, whether you're:

• An employer looking to meet your legal duties and manage pension contributions accurately

• An individual wanting to understand your payslip, claim missed tax relief, or prepare for upcoming changes.

Please get in touch: https://www.shepherdpartnership.com/contact.  We are here to help.