The current method of paying contributions into Smart Pension is under HMRC's 'Net Pay Arrangement'. Despite its somewhat confusing name following the definition set out by HM Revenue & Customs, this arrangement ensures that 100% tax relief is achieved via payroll. This is because all contributions are paid over to Smart Pension 'Gross', thus removing the need to claim the higher and additional relief via Self-Assessment.
A Net Pay Arrangement will not provide a 20% tax credit to employees earning below their relevant personal allowance for income tax.
If your pension contribution is taken through your employer, it will usually come out of your take-home pay after tax has been applied. This means your employer deducts the net amount, and the pension provider then claims 20% tax relief from HMRC and adds it to your pension. This method of tax payment is known as the Relief at Source method.
If you make your contribution directly, you also need to allow for the 20% tax relief that we claim back for you under Relief at Source. For example, to make a £100 gross contribution, you would pay £80 net. We would then claim £20 tax relief from HMRC and add it to your pension.
If you are a higher rate or additional rate tax payer, you will need to claim your additional tax relief via a self-assessment.
For more information please refer to the HMRC pensions tax manual and for independent financial advice on pension contribution taxes visit MoneyHelper’s designated page.
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