There are two HMRC approved methods for paying contributions into a Pension Scheme. At present Smart Pension only offers a Net Pay Arrangement; however we intend to introduce a Relief at Source option shortly.
Net Pay Arrangement
The current method of paying contributions into Smart Pension is under HMRC's 'Net Pay Arrangement'. Despite its somewhat confusing name following the definition set out by HM Revenue & Customs, this arrangement ensures that 100% tax relief is achieved via payroll. This is because all contributions are paid over to Smart Pension 'Gross', thus removing the need to claim the higher and additional relief via Self-Assessment.
Note – a Net Pay Arrangement will not provide a 20% tax credit to employees earning below their relevant personal allowance for income tax.
An alternative method for paying contributions is under HMRC's 'Relief at Source' arrangement, where the payroll calculates 20% tax before employee contributions are paid to the scheme. As this employee contribution gets paid to the pension 'Net' of 20% tax, the provider must reclaim this 20% tax from HMRC. Please note that Smart Pension does not currently offer this method of claiming tax relief.
Note – employees who pay tax at the higher and additional rates will be required to complete a Self-Assessment to claim their full tax relief.
For more information please visit: http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm04200040.htm
National Insurance (Social Security)
Both employee and employer pension contributions are exempt from tax; however under National Insurance this is not the case:
Employer Contribution – Exempt (NI relief can be obtained)
Employee Contribution – Not Exempt (NI Relief cannot be obtained)