Q&A: pension deductions and tax relief at source

In our regular Q&A series, Croner Taxwise experts explain how to deal with pension opt outs in terms of relief at source and net pay pension schemes when auto enrolment and opt out spans a tax year

Q: How do you process refunds of pension contributions when auto enrolment and opting out span a tax year?  What about dealing with relief at source and net pay pension schemes when processing payrolls?

A: A newly established Ltd Company who recently registered for PAYE and has to comply with auto enrolment pension duties started to roll out the auto enrolment process for all eligible employees from March 2019 (Pensions Act 2008 section 3).  The company was unsure how refunded contributions should be processed in the April payroll should any employee choose to opt out (Pensions Act 2008 s8).

Paragraph 44 of The Pensions Regulator (TPR) detailed guidance for employers states: ‘When an employer is given a valid opt-out notice, they must refund to the jobholder any contributions that have been deducted from pay (less any tax due) by the refund date, which is either:

  • within one month of being given the valid opt-out notice; or
  • in the next available payroll run after they were given the notice.’

As any potential refunds would fall into the new tax year, the company asked if an Earlier Year Update (EYU) would need to be processed for the employees concerned to correct the taxable year to date position. 

An EYU will not be due as the employer was operating a scheme which gives relief at source - this means that the relief is actually given when the pension is paid to the pension fund - it will be ‘grossed up’ in the fund - relief at source does not mean relief through the payroll.

As employees’ contributions are simply deducted from net pay, the refund would be processed as a net adjustment.

If the company had been operating a net pay arrangement, then contributions would be deducted from gross pay before tax – thus giving tax relief (but not national insurance contributions’ (NICs) relief) through the payroll.

Such schemes would normally only be operated in large organisations and need HMRC approval.

Even if the company had been operating a net pay scheme it would have been acceptable to process the refund in April payroll as additional gross pay adjustment without the need to process an EYU.

In summary, a relief at source pension scheme means that employees’ contributions are deducted from net pay and receive basic rate tax relief when the pension contributions are paid to the pension fund. A net pay scheme means that employees’ contributions are deducted from gross pay before tax.

In either case, there would be no requirement for EYUs when refunding employee contributions following an opt-out. Following HMRC changes to real time information (RTI) submissions, the EYU ceased to be a valid submission from 19 April 2019, however EYUs will still be accepted for 2018-2019 tax year.

Contributed by the tax experts at Croner Taxwise Croner Taxwise advice lines Tel: 0844 892 2470

This article first appeared on Croner Taxwise Library TQOTW: pension deductions

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