What’s the gross tax basis?

The gross tax basis means contributions are deducted from your employees’ wages before tax is taken. HM Revenue & Customs (HMRC) refer to this as the ‘net pay arrangement’ method. Don’t be confused by this term, as pension contributions are actually taken from the gross pay, not the net as HMRC’s title suggests.

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

  • 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.
  • So, your employees will automatically get full tax relief on their contributions straightaway.
  • But unlike the alternative net tax basis,  it means lower paid employees who don’t pay tax won’t receive any tax relief.

With the gross tax basis, employee contributions are deducted from their pay before any tax is taken. This means they’ll get their full tax relief straightaway regardless of the band or rate of tax they pay, or whether they live in Scotland or elsewhere in the UK.

Example – 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 2022/23 tax year) won’t receive tax relief because they don’t earn enough to pay tax.


If you’d like more information on tax relief, visit our webpage ‘Helping you with tax relief’, or visit HM Revenue & Customs or The Pensions Regulator’s website.

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