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Pension Tax Relief: What Is It?

Key Processes to Get Pension Tax Relief

Tax Relief: In-Case of Not-Paying Tax

How to Avoid After-Effects of Not-Paying Tax?

Relevant UK Earnings

Salary Sacrifice Arrangements

Self-Invested Personal Pension Schemes

Higher Rate Taxpayers

Tax Credits and Universal Credits

Pension Tax Relief: What Is It?

Tax relief is an added amount into a pension that individuals generally set aside for retirement. Pension tax relief (PTR) is a helpful feature; when a person pays into retirement, a significant amount of tax money under the government is transferred into that pension as a substitute.

Hence, PTR supports dropping the amount of payable tax and raising future savings. However, tax relief is determined based on the individual’s income tax and pension scheme. HMRC also imposes limits on the amount of tax relief that is entitled to individuals.

Key Processes to Get Pension Tax Relief

Individuals with pension contributions have to go through “Relief at source” and “Net pay” as two main ways to obtain tax relief. An employer decides the process of workplace pension tax relief. On the other hand, self-employed workforces use the Relief at Source method.

Process 1: Relief at Source

The government boosts people’s contributions with relief at source so they can claim higher tax returns.

Employer subtracts regular taxes from employees’ taxable UK salaries and pension contributions and sends it to the pension provider. Afterwards, the pension provider privileges 20% in tax relief unswervingly from the government and adds it to the employee’s pension pot.

Employees who pay more tax rates than 20 per cent, employed or self-employed, can claim further tax relief via a tax return. Furthermore, employees can also claim extra tax from the HMRC head-on.

Process 2: Net Pay

Pension contributions are cut out from the lower amount of UK earnings in net pay, so the individuals pay less tax.

Employer subtracts the total amount of pension contribution from employee’s salary before any tax deducted by HMRC. However, a person can receive tax relief while paying less tax if he pays the full pension contribution himself.

In net pay, whatever tax rate an individual pays, he can obtain complete tax relief without claiming it. Moreover, in this method, the employee will not receive tax relief if he does not pay any tax.

Tax Relief: In-Case of Not-Paying Tax

If an individual earns less than the Personal Allowance and does not pay tax, he will not get tax relief. Depending on a tax relieving scheme, employees with a workplace pension are not subject to tax relief if they do not pay taxes.

There are two types of not-paying tax cases, i.e., net pay and relief at source.

Case 1: Employee’s workplace pension set up with the net pay method gets deducted from the full amount of pension contribution before any tax subtractions.

Instead of getting tax relief directly from the pension contribution, in this method, employees receive tax relief via a lower tax bill. However, if they don’t pay tax, there will be no tax bill and tax relief.

Case 2: Under the relief at source method, the pension provider always claims tax relief at the basic rate of 20 per cent.

However, the pension provider claims tax relief from the government and adds it to the employee’s pension pot. Thus, if an employee does not pay according to UK earnings, he will not benefit from tax relief. 

How to Avoid After-Effects of Not-Paying Tax?

There are several ways you can avoid the after-effects of not paying tax, listed down below:

  • Ask the employer to set up a workplace pension scheme.
  • Query the employer to consider a tax relief scheme that operates well at the relief at source method.
  • Ask the employer to operate the same method for all staff in the scheme to avoid tax relief losses.
  • Don’t try to leave the scheme that an employer sets up.
  • Don’t try to create a new & self-owned scheme; otherwise, you’ll miss the contributions that your employer made. 

Tax Relief Method for Employee’s Scheme

The easiest approach to check the scheme is to ask the human resources department if you’re employed or check with the pension provider.

Check your scheme according to the two methods listed below:

  • Net Pay: Complete pre-tax pension contribution.
  • Relief at Source: Lower pension contribution taken from after-tax pay and tax relief is claimed from the government by employee’s pension provider.

Relevant UK Earnings

Relevant UK earnings are the type of earnings that are comprised of multiple forms of money.

It includes income from employment such as salary, wages, bonus, kids benefit, and overtime commissions.  Moreover, it encompasses redundancy payment above the £30,000, profit-related pay, income from a trade, rental income, and patent income.

Salary Sacrifice Arrangements

Many employers offer their employees’ pension schemes in conjunction with a salary sacrifice arrangement to avoid National Insurance contributions (NIC).

A salary sacrifice agreement is a contract between an employee and an employer that requires them to give up a portion of their pay.

Moreover, it can impact future pension calculations so that employees must be knowledgeable about all facets of employment laws before settling on salary sacrifice arrangements.

Self-Invested Personal Pension Schemes

In a self-invested personal pension, the contributions to the scheme are usually treated as after-tax pay. Pension provider claims a basic tax rate of 20% from HMRC, add it to pension pot and provide tax relief.

For Example, The pension provider will claim £20 if an employee contributes £80. As a result, a total of £100 will be added to the employee’s pension account.

Higher Rate Taxpayers

Higher rate taxpayers can claim more tax relief from HMRC via a self-assessment tax return.

For Example: If an individual pay income tax at 40%, he can claim an extra £20 tax relief. It makes the cost of a £100 contribution into your pension £6, which means £20 claimed through your pension provider and £20 reclaimed by you.

Tax Credits and Universal Credits

Benefits such as universal credit or tax credits into pension contributions reduce the amount of income that is taken into account in assessing employees’ higher awards.

Employees should double-check the position for any benefits they are claiming. Whether you’re in a net pay scheme or getting relief at a source, make sure the authorities are aware of your pension contribution amounts.

Pension Planning for Better Tax Relief

Employer pension contributions are tax-efficient if the yearly allowance is not exceeded. However, if an individual owns a business, he can deduct pension payments as a business expense, which can be a tax-efficient approach to extract value from the company.

Though, with all of the recent changes to pension laws, employers may discover that their pension is no longer the greatest investment for long-term investments.

Bloom financial employees’ pension tax relief services assist both employees and employers in determining the best options. Our team helps in dealing with a spouse’s pension to provide a joint income in retirement, Net pay & Relief at source methods, and choosing the accurate employee workplace scheme.

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