Your employees get tax relief on the money they pay in. Set the scheme up in the right way and you could pay less National Insurance Contributions too.

Tax relief on contributions

The government gives tax relief to employees on the amount of money they contribute to their pension pots.

So when you set up your pension scheme, you have to choose 1 of the 2 tax relief methods available:

How to set up tax relief correctly

You need to check that your tax relief settings for your employees’ pension contributions match on your payroll and your pension scheme. If your payroll and pension scheme don’t match, it’ll mean more work for you and additional submissions to HMRC.

HMRC are vigilant in monitoring tax relief – in some cases revealing and fining employers who have managed tax relief incorrectly. Also, if the tax settings are incorrect, it could mean that the contributions are less than the minimum legal requirement.

When you sign up, we’ll ask you to confirm that your payroll has been set up to deduct employee pension contributions on the correct tax basis. We’ll also ask you to check and confirm you understand the tax basis every year.

Net tax basis (deducting contributions after tax)

Net tax basis is the default tax relief method with us. HMRC call it ‘relief at source’.

Net tax basis is great for lower paid employees.

1. Under this tax basis, you’d deduct employee contributions from their pay after tax is taken – that’s why we call this tax basis net.
2. Next, we claim the tax relief – at the basic 20% rate of tax – from the government on your employees’ behalf and add it to their pension savings.

If any of your employees are Scottish taxpayers and they pay the Scottish starter rate of Income Tax at 19%, we’ll still give them tax relief at 20% and HMRC won’t ask your employees to repay the difference.

If your employees don’t pay tax as their earnings are below the annual standard personal allowance (£12,570 for the current tax year 2024/25), they’ll still get tax relief on their pension contributions at the basic rate of 20% as follows:

If any of your employees pay more than the basic rate of tax, they can claim the extra tax relief direct from HMRC through their tax return.

Here’s an example of how net tax basis works in practice

Mike doesn’t earn enough to pay tax. £8 goes from his wages into his pension pot. The People’s Pension then claims 20% in tax relief, adding an extra £2 to Mike’s pension pot – the same 20% rate as a basic rate taxpayer.

Gross tax basis (deducting contributions before tax)

Pension contributions taken under the ‘net pay arrangement’ are actually taken from the gross pay, not the net as HMRC’s title suggests! So we call it the gross tax basis instead.

Gross tax basis works well if all your employees pay tax.

1. Under this tax basis you’d deduct employee contributions from their pay before tax is taken – that’s why we call this tax basis gross.
2. So, your employees will automatically get full tax relief on their contributions straightaway, regardless of the band or rate of tax they pay, or whether they live in Scotland, Wales or elsewhere in the UK.

But unlike the alternative net tax basis, it means lower paid employees who don’t pay tax won’t benefit from tax relief.

Here’s an example of how gross tax basis works in practice

John normally pays the basic 20% rate of tax. £50 goes from his wages into his pension savings before any tax is taken from his pay. This reduces his taxable earnings by £50 so he pays £10 less in income tax.

However, any employees earning less than the standard personal allowance of £12,570 a year (for the current tax year 2024/25) won’t benefit from tax relief because they don’t earn enough to pay tax.

Q&A’s

More information about tax relief

If you’d like more information on tax relief, visit HM Revenue & Customs and The Pensions Regulator’s websites.

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Salary Sacrifice

What is salary sacrifice?

Salary sacrifice, sometimes known as salary exchange, is an arrangement you can make available to your employees where they agree to a reduction in their salary or bonus that is equal to their pension contribution. In return, you’ll pay that value as an additional employer pension contribution on top of your existing employer contributions.

What are the benefits?

As the employee is sacrificing part of their salary, both you and they pay less in National Insurance contributions (NIC). Your employee will also pay less income tax.

There are several potential benefits to this:

1. You and they can pay the tax savings into your employee’s pension pot – helping them save even more for the future.
2. They can increase their take-home pay.
3. You can offer an improved benefits package to your employee.
4. You can reinvest the money you’ve saved back into the business.

These savings in action

Employer savings

Figures in the below examples are based on an average salary of £25,000 per employee, with each sacrificing the legal minimum contribution of 5% on a qualifying earnings basis.

1 Scheme member

Salary sacrificed by the employee: £938

Employer NIC rate (2024/25): 13.8%

Employer’s yearly NIC savings: £129.44

50 Scheme members

Total salary sacrificed by all employees: £46,900

Employer NIC rate (2024/25): 13.8%

Employer’s yearly NIC savings: £6,472.20

500 scheme members

Total salary sacrificed by all employees: £469,000

Employer NIC rate (2024/25): 13.8%

Employer’s yearly NIC savings: £64,722.00

Employee savings

The below example assumes the employee earns £25,000 per year (that’s £2,083.33 per month), with you contributing 3% and them contributing 5% on a qualifying earnings basis.

Your contribution per month:	£46.90
Their contribution per month:	£78.17
The Income Tax reduction:	£15.63
NIC reduction:	£6.25

Net take home pay is only reduced by £56.28 and the employee will have £125.07 going into their pension pot each month.

Setting up salary sacrifice

You can offer salary sacrifice to all your employees, as long it doesn’t reduce their salary to below minimum wage or below the lower earnings threshold.

Getting set up in just a few simple steps:

1. Contact your payroll to see if they can facilitate salary sacrifice.
2. Get permission from your employees before entering them into a salary sacrifice arrangement – by a change in their contract or through an agreement letter. If they don’t agree to salary sacrifice, you’ll need to take their pension contributions in the usual way.
3. Create a salary sacrifice worker group in your Online Services account. Make sure this is set up so that all contributions are paid by you and that the worker group is labelled accordingly eg ‘Salary sacrifice’. You’ll still need a standard worker group for those employees that don’t agree to pay in their pension contributions using salary sacrifice.
4. Once you have the employee’s permission and the new worker group in place, you can set up the salary sacrifice arrangement through your payroll. Before sending us any pension data, make sure your worker groups match your payroll and, if submitting a data file, your worker IDs have been updated on the file.

You should take specialist employment advice on how best to vary the employment contract to allow for salary sacrifice.

Make sure it’s right for you

Salary sacrifice won’t be for everyone, so there are a few things to consider before setting it up:

Salary sacrifice affects the employee’s terms and conditions of employment and is a matter of employment law, not tax or pensions law. 

More information on salary sacrifice/salary exchange:

• The Pensions Regulator’s detailed guidance section 4
• HM Revenue and Customs’ salary sacrifice guidance