Tax and your pension

1. When it comes to paying in pension contributions, Smart Pension uses the net pay tax relief method, rather than a relief at source method. We believe it makes life easier for most of our pension scheme members.

2. Your situation is unique, and so is your liability for paying tax. For that reason, you can ask your employer or a financial adviser (if you have one) for information about tax relief and your pension. In addition, there is a great deal of free impartial information about tax relief and pensions on the MoneyHelper website. You can also speak to MoneyHelper representatives on their free consumer helpline if you have any questions.

Instead of passing some of your money to the government as tax, it goes into your pension instead. That’s tax relief. It’s the government’s way of encouraging you to save for retirement. The amount of tax relief you get relates to the amount you put into your pension scheme. Tax relief gets paid on your contributions at the highest rate of income tax you pay.

In England and Wales:

• basic rate taxpayers get 20% pension tax relief
• higher rate taxpayers can claim 40% pension tax relief

The Welsh Government now has powers to set its own income tax, too.

In Scotland:

• starter rate taxpayers pay 19% income tax as the Smart Pension Master Trust operates on a net pay basis
• basic rate taxpayers pay 20% income tax and get 20% pension tax relief
• intermediate rate taxpayers pay 21% income tax and can claim 21% pension tax relief
• higher rate taxpayers pay 41% income tax and can claim 41% pension tax relief
• top rate taxpayers pay 46% income tax and can claim 46% pension tax relief

You can put as much money as you want into your pension, but the government limits the amount of pension contributions on which you earn tax relief. This is called the pensions annual allowance.

For the tax year 2024–25, this is set at £60,000. Any pension contributions going over the £60,000 limit will be subject to an annual allowance charge at the highest rate you pay (but you can also carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years). If you have already started to take your pension, a lower limit of £10,000 may apply.

Net pay arrangements – the option that we use here at Smart Pension

In this arrangement, payments are taken from your gross salary before income tax has been deducted. This means you get tax relief via PAYE at the highest marginal rate. You don’t have to claim any tax relief on your wages from HMRC, even if you pay income tax at higher than the basic rate. However, it also means you don’t get a contribution from the government if your wages are lower than the lowest marginal rate (and you’re not paying income tax).

Here’s an example:

Ben is paid a gross salary of £2,500 every month. He puts 10% (£250) of that salary into his Smart Pension account. Ben’s employer takes his payments from his gross salary before deducting tax. His employer then puts extra money in, equivalent to another 4% (£100). In total, Ben sees a monthly contribution of £350 going into his Smart Pension account – including £50 tax relief.

Relief at source – Smart Pension doesn’t currently offer this option

In this arrangement, contributions are taken after tax and National Insurance have been taken off. In other words, for a basic rate tax payer, 80% of the contribution is taken from the net salary. Another 20% is added to the pension scheme by the pension provider, who then claims that back from HMRC (for a higher rate tax payer, the additional tax relief would need to be claimed back via the self-assessment tax return process).

Here’s an example:

Anna is paid a gross salary of £2,500 every month (we’ve ignored National Insurance for a moment, to keep this example simple). Anna wants to put 10% of her salary in her workplace pension. To do that, she makes a net contribution of 8% of her gross salary, which is £200 (the 8% equates to 10% minus 20% tax relief).

Her employer then puts extra money in, equivalent to another 4% (£100). The pension provider then adds the 20% basic rate tax relief (£50) and does the work to reclaim that amount from HMRC.

In total, Anna sees a monthly contribution of £350 going into her Smart Pension account, for an up-front cost of £200 deducted from payroll. The member still receives tax relief of £50, the same amount as would be received under the 'Net Pay' method, but it is paid into her account in a different way.

If you need more information, or have any questions, you can contact MoneyHelper, either online or by calling their consumer helpline on 0800 011 3797.

You can also speak to a financial adviser. If you don’t have one, you can search the MoneyHelper adviser directory .