Employer sponsored occupational schemes have two options:

1. Net Pay Method – employee contributions are taken out of their gross pay before income tax is deducted

EG – an employee wants to make a £100 contribution, this is taken out before income tax is paid, thus reducing their pay by £100 for income tax purposes. As a higher rate tax payer, their income tax liability is therefore reduced by £40 (40%).

2. Relief at Source – paid net of basic rate tax

EG – an employee wants to make a £100 contribution. The net contribution of £80 is deducted from the net pay of the employee (ie after NIC and income tax). The Pension provider then claims the £20 (20%) basic rate tax relief from HMRC directly.

For the Relief at Source method, any additional tax relief is awarded via a self-assessment tax return as the gross pension contribution increases each tax band, meaning more income is taxed at 20% rather than 40% for a higher rate payer. For additional rate payers, it would be the amount taxed at 20% and 40% rather than 45%.

For contributions into a personal pension, it is done via the Relief at Source method.