Calculate pension contributions under a net pay arrangement. See how contributions are deducted before tax and compare with relief at source.
Under a net pay arrangement, employee pension contributions are deducted from gross pay before income tax is calculated. This means the employee automatically receives full income tax relief on contributions at their marginal rate (20%, 40%, or 45%) through the payroll. Most workplace pension schemes, including LGPS and NHS Pension, use the net pay method.
Net pay: deducted before tax — full relief automatically, suits all tax rates. Relief at source: deducted from net pay, pension provider claims 20% basic rate relief from HMRC — higher-rate taxpayers must claim the extra 20-25% through Self Assessment. For basic-rate taxpayers the outcome is the same. For non-taxpayers, relief at source is more beneficial (they get 20% credit even though they pay no tax).
Yes — this has been a significant policy issue. Non-taxpayers (those earning below the personal allowance) contribute to net pay schemes but receive no tax relief because they have no tax to save. Workers earning £10,000–£12,570 in schemes like NEST or People's Pension suffer this disadvantage. From 6 April 2024, a government top-up was introduced to address this gap for low earners.
You can contribute up to 100% of your UK earnings each tax year and receive tax relief, subject to the annual allowance of £60,000 (2023/24 onwards). If you or your employer contribute more than the annual allowance, a tax charge applies. The money purchase annual allowance (MPAA) of £10,000 applies if you have flexibly accessed a defined contribution pension.
Yes — you can carry forward unused annual allowance from the three previous tax years to supplement the current year's allowance. This is useful for large one-off contributions. You must have been a member of a registered pension scheme in the carry-forward years (even if no contributions were made). Your pension provider or financial adviser can help calculate available carry-forward.