Net Pay vs Relief at Source Pension Calculator
There are two ways pension schemes claim tax relief: net pay (deducted before tax, from gross pay) and relief at source (deducted from net pay, scheme reclaims basic rate tax). For low earners below t
Net Pay vs Relief at Source
Net Pay Arrangement
- Employer deducts pension contribution from gross pay before calculating PAYE
- You get tax relief 'automatically' because income is reduced
- If you don't pay tax (income below personal allowance), you get NO tax relief — just a reduction in gross pay
- Most workplace pension schemes (NEST, many master trusts) use net pay
Relief at Source Arrangement
- Employer deducts pension from net pay (after PAYE)
- Pension scheme reclaims basic rate tax (20%) from HMRC and adds it to your pot
- You always get at least the 20% basic rate top-up, even if you're a non-taxpayer
- Common in personal pensions, SIPPs, some employer schemes
The 'Net Pay Anomaly' and HMRC Compensation
Under the old rules, low earners in net pay schemes paid more than those in relief at source. From 2024/25 onwards, HMRC introduced a top-up payment for low earners in net pay schemes. HMRC calculates the shortfall and pays it directly to individuals after the tax year.
Higher Rate Relief
Higher rate (40%) taxpayers can claim additional relief (beyond the 20% basic rate) via Self Assessment: claim the difference between 40% and 20% = 20% of contributions. Under net pay, this is automatic. Under relief at source, you must claim the extra 20% through Self Assessment.
Frequently Asked Questions
What is the difference between net pay and relief at source?
Net pay: pension deducted before income tax is calculated (automatic relief at your marginal rate). Relief at source: pension deducted from net pay; scheme claims 20% back from HMRC. For basic rate taxpayers, the end result is the same. For non-taxpayers: relief at source gives a 25% bonus (£100 contribution costs £80 net); net pay gives nothing extra.
Who is affected by the net pay anomaly?
Workers earning less than the personal allowance (£12,570 in 2025/26) who are enrolled in a net pay workplace pension scheme. Typically part-time workers, low-wage earners, and those below 21 or on apprentice wages. They contribute to the pension but receive no tax uplift — paying more effectively than equivalent workers in a relief at source scheme.
How much does the net pay anomaly cost?
Maximum loss: approximately 25% of pension contributions for a non-taxpayer. HMRC introduced a compensation payment from 2024/25. For a non-taxpayer contributing 5% on a £10,000 salary = £500 contribution. At 25% relief, they should receive ~£125 extra (£100 contribution = £125 in pot). Under net pay, they miss this.
Does HMRC now compensate net pay anomaly sufferers?
Yes, from 2024/25. HMRC pays a top-up payment to individuals in net pay schemes who earn below the personal allowance. The top-up is 20% of net contributions, paid after the end of the tax year. HMRC identifies eligible individuals through RTI data — no claim required.
Should higher rate taxpayers claim relief at source through Self Assessment?
Yes. If you're in a relief at source scheme and pay higher rate (40%) tax, you must claim the extra 20% tax relief via Self Assessment. The scheme only reclaims basic rate (20%) — you're entitled to 40% relief in total. Unclaimed relief from up to 4 tax years can be backdated.
Can I transfer from a net pay to a relief at source scheme?
Typically not within a workplace scheme — the arrangement is set by the employer/trustee. If your employer uses net pay and you earn below the personal allowance, you may want to raise this with HR, or supplement with a personal SIPP (which uses relief at source). Check with your pension provider.
Does salary sacrifice count as net pay or relief at source?
Salary sacrifice is neither — it reduces contractual salary, so employer pays less (no PAYE or NI on the sacrificed amount). It's more tax-efficient than both net pay and relief at source for most employees. However, salary sacrifice can affect benefits (State Pension credits, mortgage affordability, maternity pay) and must keep wages above NMW.
Is there a pension tax relief limit in 2025/26?
Yes. You can only receive pension tax relief on contributions up to 100% of your earned income (or £3,600 for non-earners). The annual allowance cap (£60,000 or tapered for high earners) limits total pension input. Tax relief is not available on contributions above these limits.