Making pension contributions using tax relief at source
When making employee pension contributions with tax relief at source, an agreed amount of money is deducted from the employee’s pay and contributed to their pension. The specific approach to this depends on the arrangement of your pension plan.
Key information
- Find guidelines on how to accurately calculate employee contributions, taking into account 20% tax relief applied by Royal London.
- Learn how to ensure post-tax employee contributions are deducted correctly to avoid incorrect tax relief and potential repayment.
Using tax relief at source
Royal London will apply 20% tax relief to any employee pension contribution, so your contribution submission should always take account of this. The easiest way to calculate the employee contribution to be paid is you as the employer only needs to pay 80% of it.
- As the employer you deduct tax from the employees taxable UK earnings as normal.
- Then you deduct the net (of basic rate tax) pension contribution (note this is from the after tax pay).
- This is the contribution you'll upload to your auto enrolment dashboard each month.
- We (Royal London) then gross up the pension contribution for basic rate tax and claim the 20% tax relief direct from HM Revenue & Customs (HMRC).
- Employees who pay a higher rate of tax than the basic rate, will need to claim any additional tax relief from HMRC through their self assessment.
Making sure your employees get the right tax relief
Making sure employee contributions are deducted correctly is important to ensure tax relief is applied accurately. Here's what you need to know:
- Employee contributions should always be taken from pay after tax has been deducted.
- If contributions are taken before tax, Royal London will assume the member has already paid tax, leading to incorrect tax relief for the employee.
- Getting employee contributions right is key to avoiding issues with tax relief. If excess tax relief is claimed, we may ask you to repay the difference.
How to calculate pension contributions using tax relief at source with examples
Using qualifying earnings
If qualifying earnings is your definition of pensionable pay, you’ll exclude earnings below the lower level of qualifying earnings, and above the upper level of qualifying earnings.
The Pensions Regulator provides examples of the lower and higher level of qualifying earnings for different pay reference periods.
| Pay reference period | ||||||
|---|---|---|---|---|---|---|
| Year | Week | Fortnight | 4 weeks | Month | Quarter | |
| Lower level of qualifying earnings | £6,240 | £120 | £240 | £480 | £520 | £1,560 |
| Higher level of qualifying earnings | £50,270 | £967 | £1,934 | £3,867 | £4,189 | £12,568 |
When you submit contributions to the auto enrolment dashboard, it’s important you provide the qualifying earnings amount for the contribution period (not the overall yearly salary) in the ‘earnings in contribution period’ column.
For example:
Using qualifying earnings, the minimum contribution rate is 8%. You, the employer, must contribute at least 3%.
If an employee, Faisal, earns £2,000 basic pay in a month, plus £500 commission and £500 overtime. Their pensionable earnings, if based on qualifying earnings, and before tax and National Insurance, would be £2,840 (£3,000 - £520).
The employer contribution is 3% of £2,480 (£74.40), and the employee contribution is 5% of £2,490 (£124).
At the other end of the scale, another employee, Renuka, earns £5,000 each month before tax and National Insurance (with no commission or overtime). Their pensionable earnings if based on qualifying earnings, would be £3,669 (£4,189 - £520).
The employer contribution is 3% of £3,669 (£110.07), and the employee contribution is 5% of £3,669 (£183.45).
If you deduct contributions via relief at source, the employee contribution is reduced by the 20% made up of tax relief, So the employee's contribution becomes 4% (80% of 5% = 4%).
This make the employee contribution for Faisal £99.20 (4% of £2,480 = £99.20).
And for Renuka £146.76 (4% of £3,669 = £146.76).
Using total pay
Total pay includes all the money an employee is paid from their first £1 of their earnings. It includes employee earnings, holiday pay and statutory benefits (like statutory sick pay or statutory maternity pay). It also includes bonuses, overtime payments and commission they may earn. The minimum contribution rate is 7%, with an employer contribution of at least 3%. The remainder is made up with the employee's contribution.
For example:
If an employee, Faisal, earns £1,000 basic pay (before tax and National Insurance), plus commission of £200 and bonus of £100, then their pensionable earnings are £1,300.
The employer contribution is £39 (3% of £1,300 = £39).
The employee contribution is 4% (the minimum 7% rate, less the employer’s 3%).
If you deduct contributions via relief at source, the employee contribution is reduced by the 20% made up of tax relief. So the employee’s contribution becomes 3.2% (80% of 4% = 3.2%).
For Faisal, in our example, their contribution would be 3.2% of £1,300 = £41.60.
Using basic pay - 9%
The minimum contribution rate is 9% of an employee’s basic pay, at least, and from their first £1 of earnings. An employer must contribute at least 4%, and the remainder is made up with the employee's contribution.
For example:
If an employee, Faisal, earns £1,000 basic pay (before tax and National Insurance), plus commission of £200, then their pensionable earnings are £1,000.
The employer contribution is £40 (4% of £1,000 = £40).
The employee contribution is 5% (the minimum 9% rate, less the employer’s 4%).
If you deduct contributions via relief at source, the employee contribution is reduced by the 20% made up of tax relief. So the employee’s contribution becomes 4% (80% of 5% = 4%).
For Faisal, in our example, their contribution would be 4% of £1,000= £40.
Using basic pay - 8%
The minimum contribution rate is 8% of an employee’s basic pay, at least, and from their first £1 of earnings. An employer must contribute at least 3% and the remainder is made up with the employee's contribution.
For example:
If an employee, Faisal, earns £1,000 basic pay (before tax and National Insurance), plus commission of £200, then their pensionable earnings are £1,000.
The employer contribution is £30 (3% of £1,000 = £30).
The employee contribution is 5% (the minimum 8% rate, less the employer’s 3%)
If you deduct contributions via relief at source, the employee contribution is reduced by the 20% made up of tax relief. So the employee’s contribution becomes 4% (80% of 5% = 4%).
For Faisal, in our example, their contribution would be 4% of £1,000= £40.
More about making contributions