Understanding pension payments

Pensions. How can something so important also be so complicated for employees to understand?

Thanks to auto-enrolment, by the end of next year almost all UK employees will have a workplace pension scheme. Many will already have a workplace pension or a personal pension. However, most employees don't even know that there are actually two ways to claim tax relief on a pension - and depending on the type of pension scheme that they have, the employee may need to fill in a self-assessment tax return in order to claim the full tax relief on pension contributions.

It's a nightmare for employers to navigate. And when employers are the ones providing the pension, their employees are naturally going to look to the employer for help understanding the pension as well.

Which is why we've put together this blog post and downloadable guide about pension contributions.

Why is it important?

For employees who have a salary sacrifice pension, things are relatively easy. Although salary sacrifice can be difficult to explain at first, ultimately a salary sacrifice pension is the least amount of work for the employee. The tax relief on contributions is automatically applied at the correct tax rate, without the need for the employee to fill out any forms.

However, for a number of (very legitimate) reasons, an employer might choose not to offer their pension scheme via salary sacrifice. Salary sacrifice comes with a raft of potential complications depending on the demographic of your employees. For example, salary sacrifice could affect an employee's entitlements to maternity allowance or the state pension, and also the amount that an employee can borrow in a mortgage - as it affects the employee's take home pay. If an employer is paying a lot of their staff the minimum wage (or just about minimum wage), then they can not deduct pensions contributions via salary sacrifice as it would take their employee's earnings to below the minimum wage.

The alternative is for the tax relief to be reclaimed from taxed pay. Most pension schemes apply automatic tax relief at 20%, so basic rate taxpayers will be unaffected. However higher and additional rate taxpayers will often need to complete a self-assessment tax return in order to claim the full tax relief that they are owed. And if the pension scheme isn't registered for automatic tax relief, then all employees will have to fill in a self-assessment regardless of their earnings.

Whatever pension plan an employer chooses, or an employee takes up, it is important for them to understand how the tax relief works and what (if anything) they need to do in order to claim the full tax relief they are entitled to.

We've produced this handy two page guide to help employers to give their employees an overview of pension options and how they work. Download the guide here.

PayDashboard are official sponsors of National Payroll Week 2017

National Payroll Week celebrates the role of payroll in UK businesses, as part of this we are sharing five guides from 4th - 8th September aimed at helping payrollers and HR teams to educate employees about their finances and improve their financial well-being.