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Workplace pension - different outcomes?

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Do the two different types of workplace scheme have different outcomes in terms of what an employee can contribute?

If employee contributions come from gross pay, reducing the taxable amount, does this limit the employee contributions to gross salary? Whereas if employee pays in net of tax relief, s/h/e/tc can use external funds, resulting in uncapped capacity to contribute (ignoring tax limits)?

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By Hugo Fair
22nd Jan 2022 23:57

I hesitate to say this, but I'm not entirely clear what you're asking.
And, before continuing, I should add that though I do quite a lot of Pensions-related work this is mostly to do with it's interaction with Payroll (from the policies of DWP through the operational policing by TPR and on to contribution reporting to schemes and to HMRC) - which does not make me much of a Pensions expert.

But:
* When you say 'workplace schemes', what do you mean?
To the best of my knowledge a Workplace Pension is just a generic category (meaning the scheme is arranged by your employer) - to differentiate it from Personal Pensions (which are not related to your employer and so are commonly used by the S-E).

* When you refer to "the two different types of scheme", which types do you mean?
I'm guessing you're referring to RAS and NPA - as opposed to DB and DC, or any other number of sub-categories.

Moving on to your specific questions:
* "If employee contributions come from gross pay, reducing the taxable amount, does this limit the employee contributions to gross salary?"
A, confusingly named, NPA (Net Pay Arrangement) scheme means that the pension contributions are deducted before the employee's tax is calculated ... so, at the point of payroll being processed, that does indeed limit the employee contributions.
I've never seen it 'taken to the limit' quite like that but, if it was, the limit would have to be less than gross salary - presuming if nothing else that you wish to avoid -ve net pay - as there are other deductions likely to be in play.
Note: contributions being treated as NPA are only the EE contributions, not ER ones.

* "Whereas if employee pays in net of tax relief, s/h/e/tc can use external funds, resulting in uncapped capacity to contribute (ignoring tax limits)?"
Whereas an, equally confusingly named, RAS (Relief At Source) scheme means that the pension contributions are deducted after the employee's tax is calculated ... leaving the pension scheme administrator to claim tax relief on the contributions made by the employee and then add it to the pension pot.
Note: The tax relief claimed by the scheme is restricted to the relevant basic rate (based on employee's tax residency status) - irrespective of whether or not the employee actually pays tax.
A higher rate taxpayer (for whom this type of scheme is not really designed) can claim the difference between their relevant basic rate and higher rate from HMRC - typically via a SATR - but this doesn't go automatically into the pension scheme pot.

As you say there are various tax limits (or rather limits on the level of your tax-free contributions in a year), but I'm not aware of another specific limit on contributions for a RAS type scheme. However there may well be - as I can't see the govt allowing the scheme to claim basic rate tax against earnings you never received!

I probably shouldn't tackle this kind of question at this time of night ... and know I haven't given clear answers to your specific questions - but hope the ramblings contain some pointers to whatever it is that you seek.
If not, no doubt you'll re-focus me with a pertinent question or two!

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By Winnie Wiggleroom
23rd Jan 2022 07:38

I am assuming that your question is "does the method of tax relief given on pension contributions make a difference to how much an employee can contribute?"

In which case the answer must be no.

Provided the scheme will allow it, as far as I know, no matter what method is used an employee is able to make AVCs directly to the scheme, and indeed we have many clients that do that, it is then up to the pension company to claim the tax relief correctly or not claim at all but usually what happens is that under a NPA scheme the individual will claim full tax relief on all contributions, either at source through payroll, or through SA as payments to employer schemes not deducted from gross pay, and for a RAS it is the pension company that claims the relief.

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Replying to Winnie Wiggleroom:
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By Tax Dragon
23rd Jan 2022 07:35

You've worked my question out whilst I was resetting it.

Thank you.

I'm still being dense though. I think your answer is that an employee in either case (see below) could top up to £10,000. Which makes perfect sense. But can you complete the example saying how it would work in each scenario?

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Replying to Tax Dragon:
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By Winnie Wiggleroom
23rd Jan 2022 07:41

Tax Dragon wrote:

You've worked my question out whilst I was resetting it.

Thank you.

I'm still being dense though. I think your answer is that an employee in either case (see below) could top up to £10,000. Which makes perfect sense. But can you complete the example saying how it would work in each scenario?

Under one method the employee would pay £10,000 into the scheme, pension co would add nothing, employee would get tax relief through SA (at 20% net cost to employee is £8000).

Under the other method employee would pay £8000, pension co would add £2000, same overall result.

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Replying to Winnie Wiggleroom:
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By Tax Dragon
23rd Jan 2022 07:52

Well, one major employer (probably the biggest locally) doesn't seem to understand that.

But thank you. Makes perfect sense.

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Replying to Tax Dragon:
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By Tax Dragon
23rd Jan 2022 07:57

Tax Dragon wrote:

Makes perfect sense.

Though good luck to anyone trying to follow the conversation! Format has turned even this short thread to spaghetti.

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Replying to Tax Dragon:
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By Hugo Fair
23rd Jan 2022 13:02

Without going off on too much of a side issue (as I don't know what your local major employer is doing), Winnie's summary is only fully correct IF the relevant employee has employment earnings that without the pension deductions would need at least £2k in tax to be deducted through the year AND is not a higher rate taxpayer.

If employee's earnings are, for instance, insufficient to pay any tax on them (prior to pension contributions) then:
* NPA will not generate any tax saving for the employee ... so employee pays £10k (overall) from gross pay, but gains no benefit in tax relief on these earnings and (as per Winnie's point) scheme adds nothing 'extra' to pot.
Result is net cost to EE of £10k (not the £8k it would have been under RAS).
* Conversely, RAS would (as per Winnie's example) only have a net cost of £8k for employee to achieve the same total contribution to the pension pot.

But if employee's earnings are sufficient for enough of them (prior to pension contributions) to be taxed at HRT (where 'enough' is => pension contribs), then:
* NPA will generate tax saving for the employee at the higher rate ... so employee still pays £10k from gross pay (all of which goes to the scheme pot).
Result is net cost to EE is £6k (not the £8k it would have been as a BR taxpayer).
* Conversely, RAS will not generate any direct tax saving for the employee ... so employee pays £8k from net pay, and (as per Winnie's point) scheme adds further £2k to pot (the scheme reclaim from HMRC being restricted to BRT).
Result is net cost to EE is indeed £8k (although extra relief on HRT earnings can still be claimed from HMRC, typically via SATR, these are not sent to the scheme).

Not sure of relevance of this to your particular scenario, but again hope it helps.

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Replying to Hugo Fair:
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By Winnie Wiggleroom
23rd Jan 2022 13:43

Quite correct, I should have stated that which I took as already understood.

I would add that I don't think I have ever seen AVCs for a BR taxpayer, although we have a high volume of HR clients that contribute AVCs each year to max out the allowances such as they are these days.

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Replying to Winnie Wiggleroom:
paddle steamer
By DJKL
24th Jan 2022 10:04

You have not met my other half, she paid AVCs for years in two different employments but was never a higher rate payer.

In fact as we fast approach retirement I had better work out what she has got and where it is, whilst I have kept a reasonable track on her main pensions I have never paid much attention to the £36.27 or so monthly AVCs she used to pay and what they may now be worth.

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Replying to DJKL:
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By Hugo Fair
24th Jan 2022 12:56

Well we know who's buying the next round then ...

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Replying to DJKL:
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By Michael Davies
26th Jan 2022 09:58

Good luck on the tracing on old pensions.You say your better half is coming up to retirement,so maybe you could be looking at some late seventies schemes ? While the Pension Service can trace them; you are probably looking at paper employment records ?
In my case one seventies employer said they had never heard of me,while another responded that I had to be in that employment for five years before being eligible to join the then scheme.I do not believe either is correct,but there is little I can do about it.I vividly remember cashing in a Civil Service pension contribution of some eighteen months for about £80 cash in hand(not my best move).Knowing this I wonder if I had anyway put in a pension claim ,whether CSP records of encashment are really that accurate enough to turn me down.As I said as honest Joe I didn’t make the claim.
It probably works out at around another £1000 pa indexed linked.Not my best financial decision,but I was about 20 at the time.Maybe I should sue the CSP for poor advice at the time.

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By Tax Dragon
23rd Jan 2022 07:29

Thanks Hugo. My question was rubbish, so let me reset it with an illustration.

Employee on £1,000 per month pays 5% into the employer scheme. Come March, decides to top up so that gross contributions for the year are £10,000.

Is it the case that this could be done with a RAS scheme but not with NPA scheme (because the contribution would exceed March's pay)?

Hopefully that's clearer.

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Replying to Tax Dragon:
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By Winnie Wiggleroom
23rd Jan 2022 07:36

Tax Dragon wrote:

Thanks Hugo. My question was rubbish, so let me reset it with an illustration.

Employee on £1,000 per month pays 5% into the employer scheme. Come March, decides to top up so that gross contributions for the year are £10,000.

Is it the case that this could be done with a RAS scheme but not with NPA scheme (because the contribution would exceed March's pay)?

Hopefully that's clearer.

Can you not make AVCs instead?

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Replying to Winnie Wiggleroom:
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By Tax Dragon
23rd Jan 2022 07:43

The difference is that under RAS the trustees are used to getting tax back from HMRC; under NPA they never have to. So are your AVCs in one case net and in the other gross? Or quite what happens?

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Replying to Tax Dragon:
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By rmillaree
23rd Jan 2022 10:51

So are your AVCs in one case net and in the other gross?

Can you advise exactly how an avc's asre being added here - are they known to be direct payments from employee into the pot?. I would expect there normally be no inconsistency - so at its most basic an employees payment to nest if 80p if deducted from net pay (RAS) and £1 if net pay arengement (deducted from gross).
I would expect the referenced amount would always be the full amount that end up in the pot.

Note to complicate matters i think there are some quirky scenarios where employee may need to take some action that could perhaps not be expected (there is 3 different bixed on tax return 1-3) . So getting clarity refb tax relief from scheme provider is a must if there are any doubts.

Note the result for empoloyees may not be consistent if that employee is below tax threshold !!

Take the ultimate example employee earns 8k and employer has salary sacrifice option or allows employee to contribute via reducing taxable pay(same thing). Employee says i want to put full 8k in. Employee has no net pay and 8k in their pension.

If a similar employer has relief at source scheme - employer would deducted 6.4k from the net salary in the knowledge employee has the same 8k in their pension pot. The employer pays employee 8k gross less 6.4k dedution for pension paymnet - employee ends up with 1.6k net pay.

The cost to the employer in both examples is 8k - both examples have the same amount in the pension pot but in the second example the employee has enough for a nice holiday abroad.

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Replying to Tax Dragon:
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By Hugo Fair
23rd Jan 2022 14:29

These are murky waters (or at least those over-populated with 'it depends' and its siblings)!

"Is it the case that this could be done with a RAS scheme but not with NPA scheme (because the contribution would exceed March's pay)?"
* Winnie's solution (AVCs) is a sensible way to address the 'mechanical' issue of needing to avoid -ve Net Pay within payroll - but is therefore presumably making the assumption that the payment is made outside of Payroll (so that this is no longer purely a RAS vs NPA question)?

"So are your AVCs in one case net and in the other gross? Or quite what happens?"
* AVCs are not merely (at least AFAIK) an alternative source of contribution to a member's pot within a scheme ... they are usually a distinct type of contribution which, depending on the scheme and the AVCs chosen for it, may or may not offer a RAS or an NPA type of AVC (or the ability to choose one or the other).

One other thought ... in your scenario you say "Employee on £1,000 per month pays 5% into the employer scheme. Come March, decides to top up so that gross contributions for the year are £10,000".
Breaking all the rules regarding assumptions (even more than usual that is) ... that sounds like a typical one-person (director) company scenario?
In which case you wouldn't have most of the problems stated so far if moved to an Annual payroll - although you might introduce other ones (say relating to state pension eligibility)?

EDIT: One other (probably obvious) point ... the employee can't simply elect to make payments as a RAS or as an NPA type.
Most pension schemes only offer one or the other type - so the pension scheme has to be chosen with the required type in mind. And even where a pension provider offers schemes of both types, they don't allow treatment of contributions to be varied via employee instructions - so again the scheme needs to be chosen first.

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Replying to Hugo Fair:
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By Tax Dragon
23rd Jan 2022 14:47

This'll sound corny, but for once it's actually true. I have a friend :-) in a large company's NPA scheme. They (the employer) is allowing top-up contributions out of salary for the rest of the year, but he wants to pay more. Is it not possible to make a one-off (gross) contribution?

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Replying to Tax Dragon:
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By Hugo Fair
23rd Jan 2022 15:24

Apologies for the "typical one-person (director) company scenario" assumption.

TBH if it was almost anyone but you I would be raising a quizzical eyebrow at the combination of your friend "in a large company's NPA scheme" and your scenario of "Employee on £1,000 per month pays 5% into the employer scheme .. come March decides to top up so that gross contributions for the year are £10,000"!

But moving swiftly along ... we have gently drifted beyond my levels of certainty and into the whirlpools infested by logic (not law or even custom'n'practice) ...

"Is it not possible to make a one-off (gross) contribution?"

To me, from a practical Payroll perspective there remains a 'mechanical' problem of not running a payroll in March - which I take to be the coming March not some retrospective one - that contains deduction(s) resulting in -ve net pay.
So from what would you (or rather they) deduct the monies in order to make this one-off contribution?
I guess it's feasible (with a VERY supportive employer) to retrospectively unwind all the payroll months (and associated FPS files) in the current tax year for this one employee - and then payroll it *all* in March (subject to the required NPA amount)?
But that's a LOT of effort (with likely RTI penalties) for the employer to take on board for a presumably fairly minor player amongst their employees ... AND, as the employee appears not to be a Director, would result in questionable NIC deductions (and an almost certain loss of a 'pension year' in his NIC records).

I don't believe there's anything to stop him from making a direct contribution (outside of payroll) ... whether to his normal pot or via an AVC will depend on what the T&Cs of the particular scheme allow ... but his personal tax relief would then have to be handled by him (not the scheme or the employer), leaving him not only with all the work that entails but also the decision as to whether to use that relief (once obtained) as a further contribution!

In short, at the risk of sounding like some others on this site, he needs a pension expert - not the reasonable but unguaranteed thoughts of yours truly!

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Replying to Hugo Fair:
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By Tax Dragon
23rd Jan 2022 15:44

Hugo Fair wrote:

from what would you (or rather they) deduct the monies in order to make this one-off contribution?

His bank account.

Hugo Fair wrote:

I don't believe there's anything to stop him from making a direct contribution (outside of payroll)

That was my question. Sorry it wasn't clear in the OP.

Hugo Fair wrote:

his personal tax relief would then have to be handled by him

Agreed.

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By Tax Dragon
23rd Jan 2022 07:46

Thanks Winnie.

You're answering my questions as I still type them out.

Not sure what's slow today, my brain, my fingers* or both.

*thumbs - on the phone.

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By Tax Dragon
23rd Jan 2022 15:44

Thanks all.

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By Michael Davies
26th Jan 2022 10:02

It use to really hack me off as to whether contributions are paid net or gross of pay.It was like pulling teeth,trying to find this out.The client usually being the last person to know.

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