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Avoid these common pension reporting mistakes

14th Nov 2023
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Bright was created in 2021 when Thesaurus Software Ltd. and Relate Software Ltd. decided to join...
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As an employer, managing the ins and outs of taxes and pensions can sometimes feel like untangling a web of complexity. In fact, HMRC has even noted that some employers are making mistakes in their reporting. This could be due, in part, to the names given to each method, so let's break them down and clarify the differences. 

Two ways to obtain tax relief 

When it comes to providing tax relief on employee pension contributions, there are two main methods for employers to consider: 'Net Pay Arrangement' (NPA) and 'Relief at Source' (RAS). 

Net Pay Arrangement 

In the case of the NPA, you deduct the pension contribution before calculating PAYE. The beauty of this method is that your employees automatically receive tax relief at their marginal rate of income tax, without needing to make any additional claims. It's a simple, hassle-free solution. 

Relief at Source (also known as 'not net pay') 

In this approach, you deduct an amount from your employees' pay after calculating PAYE deductions. This amount equals the pension contribution minus the basic rate tax relief. Your pension scheme provider will then claim the basic rate tax equivalent from HMRC's Pension Scheme Services (PSS) and add that claimed amount to your employees' pension pots. 

Something to note: in 'not net pay' arrangements, your employees will need to claim any higher or additional rate tax relief from HMRC against their tax code or Self Assessment. 

Which method to choose? 

You might be wondering if there's any flexibility to choose the method that suits your business best.  Since April 2006, the default option for all new registered pension schemes has been Relief at Source. Nevertheless, if you meet specific conditions, you can choose the NPA when initiating a new pension scheme. Once the choice is made, it can’t be changed. 

Avoiding common mistakes 

Now, let's discuss some common errors that employers often make when implementing these methods. Being aware of these pitfalls can help you steer clear of unintentional financial hiccups. 

Reporting errors 

One of the most frequent mistakes occurs when employers incorrectly report a 'not net pay' scheme as a 'net pay' scheme in their Real-Time Information (RTI) data. This results in tax relief being provided through payroll incorrectly, in addition to the tax relief correctly provided by the pension scheme provider and HMRC PSS. The outcome is an excess of relief, and as the employer, you become liable for the under-deducted tax, which must be remitted to HMRC. To avoid this predicament, consult with your pension scheme provider to ensure your scheme is registered correctly. 

Salary sacrifice complications 

Another challenge that can arise is when businesses implement salary sacrifice arrangements linked to pension contributions. In these scenarios, employees stop making contributions but choose to divert a portion of their earnings into their pension. This structure is similar to a net pay arrangement. 

However, difficulties can arise when employers accidentally report additional employer contributions linked to a salary sacrifice as employee contributions. This can lead to the Relief at Source scheme provider claiming undue relief from HMRC PSS. Despite the employer's role in this confusion, the pension scheme provider is legally responsible for the over-claimed relief. If this situation occurs, it's essential for employers to promptly inform the pension scheme provider of the inaccuracies. 

A quick summary 

Understanding tax relief on employee pension contributions doesn't need to be an overwhelming endeavor. Armed with the right information and a bit of vigilance, you can navigate these methods smoothly, ensuring that both you and your employees can enjoy the benefits of a pension scheme without any unwelcome surprises. 

In case you ever encounter reporting errors, don't hesitate to address the issue with your pension scheme provider and HMRC PSS. Your attention to detail will be greatly appreciated by your employees and contribute to a smoother journey toward financial security in retirement. 

A payroll software that keeps pensions in mind? 

If you’re looking for payroll software that helps you to manage employee pension contributions, then you’re in the right place. BrightPay is integrated with multiple pension providers, including direct API integration with NEST, The People’s Pension, Smart Pension, and Aviva. This means you can send pension files to the pension provider directly through the payroll software. What’s more, BrightPay has auto enrolment functionality, helping you streamline your pension responsibilities even further.  

Joe moore



Written by Joe Moore | Bright




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