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"Relief at source" pensions, higher rate taxpayer

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This is a blur between a question and a grump, as I think I know the answer...but am hoping I'm wrong!

For our own staff we use NEST for the pension. I imagine this is far from a niche choice. Seemingly NEST doesn't allow the "net pay arrangement", so you have to use "relief at source". This means the pension scheme grosses up for basic rate tax.

Some of our staff will be higher rate taxpayers. Per this link it seems they'll have to either complete a personal tax return or contact HMRC (no precise details...but presumably it'd be like them requesting a tax code change) to get the higher rate tax relief.

Does anyone know any other clever alternatives? Seems a bit crap otherwise. Surely being a higher rate taxpayer isn't that rare a thing, and sucks if there's no automatic way to deal this. Possibly HMRC are quite happy if lots of above average earning staff don't get the tax relief they're entitled to from pension contributions?!

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By tom123
05th Jul 2018 16:36

Don't forget that you will need to get staff to sign something to agree to a salary sacrifice - you can't just unilaterally do it etc.

(At least, that is what I do here, although things may have moved on)

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By Wanderer
05th Jul 2018 16:56

I think that this will be a common theme resulting from Auto Enrolment that Higher Rate Taxpayers are missing out on the higher rate relief. Particularly for non SA cases and / or non represented taxpayers.

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By Matrix
05th Jul 2018 17:02

Yes I agree. They would need to call HMRC each year to provide the total contributions and to have their P800 and tax code amended. If they know about higher rate tax relief which they probably don't.

I will have to do this for some clients who were taken out of self-assessment. Clients don't have loads of higher rate employees but I doubt the employees would know. Ideally Nest and other providers should write to them as part of the service.

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Replying to Matrix:
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By Maslins
05th Jul 2018 17:19

Matrix wrote:

Ideally Nest and other providers should write to them as part of the service.

It did cross my mind that as well as the pension contributions for each staff member, I tell NEST their salary too. So NEST should know if they're a higher rate taxpayer, and could potentially top up the pension with the extra tax too.

However, I appreciate NEST wouldn't know about any possible other quirky income the individual may have/personal contributions they might make independently...or whether the individual does do a personal tax return. Therefore might be scope for double counting.

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Replying to Maslins:
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By Matrix
05th Jul 2018 17:29

But a personal pension provider only claims basic rate tax relief at source. Any additional adjustments for higher rate tax are made through the tax code/self-assessment.

No the pension provider would not know who is a higher rate taxpayer but it would be useful to advise those added to a new pension scheme how the tax relief works. I agree with you that auto-enrolment has brought about this issue and I don't know if it has been addressed by the government.

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By Marion Hayes
05th Jul 2018 17:10

This was one of the areas discussed with IFA when selecting the AE scheme when my client used Tim and Giles AE set up service.
NEST was preferable because management fees came out of contributions in fund (employee paid) as opposed to an initial set up fee (employer paid).
A letter to HMRC with details of contributions will result in a code adjustment for higher rate relief.
Personal pensions have always been on this basis haven't they?

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Replying to Marion Hayes:
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By Maslins
05th Jul 2018 17:17

Marion Hayes wrote:

Personal pensions have always been on this basis haven't they?

Yes, I think so...however I feel as though anyone making a pension contribution out of their own personal, after tax funds is likely to have a SIPP, be fairly financially savvy, and understand the consequences. I imagine many such contributions are made in late March/first few days of April, by people very aware of their income levels and trying to cleverly squeeze under a threshold.

To my mind auto enrolment is very different. It's surely all about bringing pension contributions to the masses. Those who aren't necessarily that financially savvy. If any earning in higher rates need to make a conscious action to HMRC each year that otherwise they wouldn't have to, it seems a bit against the ethos of it.

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RLI
By lionofludesch
05th Jul 2018 17:41

Employee's problem, I'm afraid.

Even a benevolent employer has no access to his (or her) income from outside that employment. There's no way an employer can "babysit" the employee beyond point her (or him) to an adviser of some sort.

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Replying to lionofludesch:
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By Matrix
05th Jul 2018 18:19

Now, there's an opportunity.

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Replying to Matrix:
RLI
By lionofludesch
05th Jul 2018 18:27

Quite.

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By pauljohnston
09th Jul 2018 10:53

Perhaps the employer could send out a statndard letter attaching a proforma letter to be sent to tax office by employee. Alternatively a note on the staff notice board could cover this.
This is the same problem with professional subscribtions. HMRC really need a better system. Millions more letters claiming tax relief will soon block HMRC 's postal system

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By aland
09th Jul 2018 11:08

There seem to be 2 options with NEST that may help.
1 Use Salary Sacrifice, so that all contributions become 'Employer' and hence gross.
2 Mark the employee as a 'non-taxpayer'. Their contributions are then not grossed up and can be entered gross and deducted from gross pay for tax by the payroll system. I don't know if this is legitimate or if it would upset something else, but it seems to work. This ends up being another version of salary sacrifice. It depends which version the payroll system supports best.

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Replying to aland:
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By Maslins
09th Jul 2018 12:33

Interesting, thanks.
1) So literally reducing the staff member's gross pay, matched by a larger employer pension contribution? This would seem easy...but presumably it would break auto enrolment requirements for a minimum of certain %s of both employee and employer? Common sense would say it achieves same thing, but I can imagine a "computer says no" response from the pensions regulator.
2) Again superficially sounds good, but like you say might it upset something else? Especially given we're talking about higher rate taxpayers here, so people on decent salaries, I'd feel uncomfortable telling NEST every month that they don't pay tax!

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Replying to Maslins:
Hallerud at Easter
By DJKL
09th Jul 2018 13:04

1. AE just needs the overall percentage, the fact employer pays it all and employee pays none is not an issue. I set up one (charity) where 8% employer contribution on day one on total salary was starting position i.e. no employee contributions and lower paid staff also benefited from AE

Political rant- in this day and age of people having multiple employments AE ought to have been set at a rate that resulted in all lower earnings receiving an employer contribution, the people most needing an AE pension are , re the system ,the least likely to get one.

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Replying to DJKL:
RLI
By lionofludesch
09th Jul 2018 14:15

DJKL wrote:

Political rant- in this day and age of people having multiple employments AE ought to have been set at a rate that resulted in all lower earnings receiving an employer contribution, the people most needing an AE pension are , re the system ,the least likely to get one.

Won't be long before AE has to apply to all earnings. But we'll get onto the top rate before the Government makes more changes.

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Replying to Maslins:
RLI
By lionofludesch
09th Jul 2018 13:23

Maslins wrote:

Interesting, thanks.
1) So literally reducing the staff member's gross pay, matched by a larger employer pension contribution? This would seem easy...but presumably it would break auto enrolment requirements for a minimum of certain %s of both employee and employer?

There isn't a minimum employee's contribution.

There's a minimum employer's contribution and a minimum total contribution.

Often overlooked, as an employer paying more than he needs is uncommon.

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Replying to lionofludesch:
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By Maslins
09th Jul 2018 14:06

lionofludesch wrote:

There isn't a minimum employee's contribution.

There's a minimum employer's contribution and a minimum total contribution.

Often overlooked, as an employer paying more than he needs is uncommon.


Ooh, looks like you're right! It's a bit confusin, see this page http://www.thepensionsregulator.gov.uk/en/employers/phasing-increase-of-...
The line immediately above the table says "...the minimum contributions you must pay..." and the table includes staff contributions. However you're right, para above seems to make it clear that if the employer voluntarily pays more, employee doesn't need to contribute.

Only issue then is one of perception. When assessing how well remunerated a staff member is I'm sure they compare salaries...and superficially doing this would reduce their salary. Still, barring that, it seems a good, easy option.

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Replying to Maslins:
RLI
By lionofludesch
09th Jul 2018 14:13

I think you need to remind them that you're doing this so that they don't have to file SA returns themselves and you can always go back to the old route if they prefer.

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Hallerud at Easter
By DJKL
09th Jul 2018 11:25

One of the things I noticed re auto enrol was the operator my employer uses (and hence I get contributions), Peoples, did not appear to have a simple way for users to collate their contributions to the scheme for the tax year and hence their individual tax return.

When I go on to my account with Hargreaves Lansdown re my SIPP finding my contribution figure to assist with completing my TR is simple, the site is geared to provide the data, Peoples I needed re 2016/2017 to search about to get the data.

Other point struck me as a source of possible error, when is contribution considered paid for tax purposes, on deduction from the employee per payslip or on payment by employer to scheme?

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By John Wheeley
09th Jul 2018 12:49

My payroll software has an empty box for a note/message to employees.
Put a suitable note in the box to alert employees ?

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By Maslins
09th Jul 2018 15:00

Following on from this and ignoring the higher rate element...is there an NIC saving to be made here?

Eg say individual on £20k salary, was doing £1k employee and £1k employer pension contributions. They're basically taxed on £19k salary, but they pay NI on £20k salary.

If instead we reduce their salary to £19k but with £2k employer pension contributions, surely they'd then suffer both tax and NI on the £19k? I've mocked up the numbers through our payroll and this seems to apply.

Does that sound correct? Done a bit of reading and seems clear as mud.

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Replying to Maslins:
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By matttaxnpayroll
09th Jul 2018 15:28

Yes you save NI, some generous employers also add back their NI saving so the employee gets a higher contribution at no extra cost to the employer (from what they were paying before the sacrifice).

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