Employers play an important role in the financial security of their employees for later in life through pension contributions. Not only do these contributions help in building a robust retirement fund for employees, but they also offer employers valuable tax relief opportunities. Let’s look at how, as an employer, you can get tax relief on your employee pension contributions.
Understanding the Two Main Methods
The UK tax system provides two primary methods for getting tax relief on employee pension contributions:
1. Net Pay Arrangement (NPA): In this approach, employers deduct pension contributions before applying PAYE (Pay As You Earn). This method is straightforward for employees, as they receive tax relief at their marginal rate of income tax without needing to take any extra steps. For employees, this translates into immediate tax relief, effectively lowering their taxable income.
2. Relief at Source (RAS): Differing from NPA, this method involves deducting contributions after PAYE. The pension scheme provider then claims back the basic rate tax relief from HMRC, adding this amount to the individual’s pension pot. However, for higher or additional rate taxpayers a further claim must be made to HMRC to receive the full tax relief due. This can be done through their tax code or a Self-Assessment tax return.
Which Method to Choose?
The choice of tax relief method is determined by the employer, not the individual employee. For all new registered pension schemes set up since April 2006, Relief at Source has been the default method. Employers, however, have the flexibility to choose the Net Pay Arrangement for new pension schemes, provided certain regulatory conditions are met. Once a scheme is registered, its form of tax relief remains fixed.
Salary Sacrifice Schemes
Many businesses choose the salary sacrifice arrangement linked to pension contributions. Under this arrangement, the employee agrees to a reduction in their salary in exchange for the employer making a higher pension contribution. This method effectively mirrors the Net Pay Arrangement in terms of tax relief. The good news is It can lead to savings on National Insurance contributions for both the employer and the employee.
However, it does require employers to be diligent in their reporting. If a salary sacrifice contribution is reported incorrectly as an employee contribution, it could lead to the pension scheme provider wrongly claiming tax relief from HMRC. The legal responsibility for any overclaimed relief falls on the pension scheme provider, emphasising accurate and careful reporting by employers.
Compliance and Reporting Obligations
To benefit from tax relief, employers must ensure their pension contributions satisfy several conditions. These include being paid within the accounting period and being wholly and exclusively for the business. What’s more, the amount of tax relief on substantial contributions may be distributed over several tax years, depending on the size of the contribution and the employer’s financial situation.
Employers are required to accurately report both their own and their employees’ pension contributions. Incorrect reporting can lead to compliance issues and potential penalties, highlighting how important good record-keeping and reporting practices are.
Maximising Tax Relief Benefits
For employers, understanding and properly managing pension contributions can lead to a sizeable tax relief. This relief can significantly reduce the overall cost of providing a pension scheme. Employers should consider the following strategies:
- Choosing the Right Pension Scheme: Choose a pension scheme that aligns with your payroll system and is suitable for your employees’ tax situations.
- Leveraging Salary Sacrifice Arrangements: Use salary sacrifice schemes to maximise tax and National Insurance savings.
- Staying Informed: Keep up to date with changes in tax legislation and pension regulations to ensure you remain compliant and can make the most of the tax relief opportunities available.
For employers, providing a pension scheme is a big part of employee benefits, offering a way for employees to plan for the future. By understanding the methods of Net Pay Arrangement and Relief at Source and sticking to reporting and compliance requirements, you can leverage tax relief opportunities and make sure you don’t pay more tax than you need to.
At Norwich Accountancy, we’re here to help SMEs like yours make the most out of pension schemes and tax benefits. Tax rules can be tricky, especially with constant changes, but we’re here to guide you. Need help? We’re all about keeping things simple and helping you get every tax relief benefit you’re entitled to.