Making the correct contributions to your employees’ pension plans

20 February 2024
The number of incorrect employee contributions being made to schemes is increasing and it's affecting tax relief claims

We're all getting used to checking in on our pension savings a lot more whilst we're on the go, so it's important that the correct contributions are being deducted from salaries and applied to the pension plan.

To help reduce some of the failings, we're asking all employers and payroll managers to check their payroll software is:

  • Designed to deduct pension contributions on a relief at source basis.
  • Set up to ensure any software updates doesn't inadvertently change these settings.

If anyone else manages your payroll, please ask them to check and confirm your payroll software or process works with the pension scheme and the basis used to make up the deductions is correct.  

How do I make the correct contributions?

If your Group Personal Pension or Group Stakeholder Pension scheme:

Includes a salary exchange arrangement 

You’ll need to calculate the employee contributions before income tax and National Insurance have been deducted.  You’ll then add this contribution to your employer contribution and upload it each month. This means that we won't claim any additional tax relief on your employee’s behalf.

For example, if your employee contributes 10% of their gross monthly salary of £2,000, the employee contribution of £200 is added to your employer contribution and uploaded to the pension scheme for that month as an employer only contribution.

Doesn't include a salary exchange arrangement 

You'll need to calculate the employee's contribution after income tax and National Insurance have been deducted.  Each month you'll upload this contribution and we'll apply 20% tax relief which we'll claim from HMRC. If any of your employees pay higher or additional rate tax, they’ll need to claim any additional tax relief direct from HMRC.

For example, if your employee contributes 10% of their gross monthly salary of £2,000 into their pension plan, their employee contribution of £160 (£200 less basic rate income tax of 20%) is uploaded to the pension scheme alongside any employer contribution expected for that month. We'll then make a claim to HMRC for the pension tax relief of 20% (£40) and add this to the employee’s net contribution of £160 to make a gross pension contribution of £200.

Net pay contributions

In some instances contributions are also made on a net pay basis i.e. before any income tax has been deducted but after the National Insurance contribution deduction. We can't accept employee contributions using a net pay arrangement as this would result in additional tax relief being claimed that would need to be paid back.

Further information

If you have any questions or would like more information please contact us.