The government’s guidance states that all UK workers aged 22 or over who earn at least £10,000 per year must be enrolled into a workplace pension scheme (auto-enrolment). There are minimum contributions that both employer and employee must legally make, with the employee required to contribute at least 5%. 

How tax relief is given 

Workplace pensions operate one of two tax relief methods in relation to the employee’s 5% contribution: 

• Relief at source (RAS) or net tax basis (NTB). Using a 5% contribution as an example, a 4% contribution is taken from the employee’s net pay, ie, their pay after pay as your earn (PAYE) and national insurance deductions have been made. The employer pays this into the pension fund on the employee’s behalf. The pension scheme then recovers an extra 1% tax relief from HMRC and adds it to the fund, totalling to a 5% contribution.
• Net pay. This is a somewhat misleading term because the employee’s 5% contribution is actually deducted from their gross pay (some workplace pension providers refer to this as the “gross tax basis”), so tax relief is given through the payroll. The pension scheme receives the 5% contribution from the employer and does not need to reclaim anything from HMRC. 

The default method can vary between pension providers. HMRC has published guidance on the two methods and one of the providers, NEST, has also published its own guidance.  

Confusion between methods 

ICAEW’s Tax Faculty has been advised of a case where the employer’s payroll was processed on the basis that it was a RAS scheme, but the pension scheme’s records showed it as a net pay scheme. This only came to light after a few years when an employee queried why their pension was not getting the 1% uplift. 

If the wrong method is used, the contributions may fall below the minimum legal contribution requirements noted above. 

Suggested action to take 

ICAEW advises employers and their agents to check that the tax relief method used on the payroll corresponds with the method on the pension provider’s records, for each employee. They may need to contact the pension provider, or review the original documents when the employer signed up with that pension provider, or subsequent annual declarations.  

If an error has been made by the employer, they will need to rework the payroll for each affected pay period to calculate contributions based on the correct method. The employer can amend payroll for the previous six tax years, so from 2019/20 onwards. There is a useful video from the Pensions Regulator on this.  

It is important that all parties, including the affected employees, are informed and consulted with as soon as possible, to agree how any shortfall in contributions will be dealt with. 

One pension provider, NEST, also provides some helpful guidance (see the second question under the heading ‘making contributions – invalid amounts’).