Net pay contributions explained

As part of our Bitesize Technical series, our Senior Technical Consultant, Lisa Webster, explains how net pay pension contributions work in practice. Watch the short video to find out:

• which pension schemes can use net pay;
• how tax relief is given;
• the advantages of net pay for higher earners; and
• how net pay differs to salary sacrifice.

Lisa also includes some worked examples that illustrate how it could all work in practice.

Watch the bitesize video now or scroll down to read through the key talking points.

Key insights on net pay

What is net pay?

Net pay is a method of receiving tax relief on personal pension contributions that can only be used by occupational pension schemes.

What pension schemes can use net pay?

The only pension schemes that can use net pay are public service pension schemes, and those set up by an employer for the benefit of their employees.

How is tax relief given under net pay?

Under net pay the employer deducts employees’ personal pension contributions from their gross pay before tax is calculated under PAYE.

Are there any advantages for higher and additional rate taxpayers?

Under net pay, full tax relief is given up front – so higher and additional rate taxpayers will get relief on the amount paid without having to claim back the extra tax relief via self-assessment. This also means that the extra tax relief is received sooner.

Where does the higher and additional rate tax relief get paid?

As the pension contribution is deducted from pay before any tax is paid, the gross amount is paid directly into the pension – which means that any higher or additional rate relief is also paid into the pension. This contrasts with the relief at source method, where only basic rate tax relief goes into the pension, with the rest paid to the member personally.

Can some employees contribute via net pay, and others via relief at source?

No, if the employer chooses to operate net pay for its pension scheme, it must operate this method for all personal contributions.

What about employees with low earnings?

Under net pay, contributions made from income where no tax has actually been paid – i.e. those that come from income within the personal allowance – will not receive any tax relief, so low earners lose out. This contrasts with relief at source, where all contributions receive basic rate tax relief at 20%.

Can low earners claim the lost tax relief?

The Government is putting in a process that means low earners under net pay will be able to get this relief, however the first claims cannot be made until the 2025/26 tax year, relating to contributions paid in 2024/25. It is also likely that low earners will have to apply for the relief, rather than it being granted automatically.

How does net pay differ to salary sacrifice?

Net pay contributions are still personal contributions: they are just facilitated by the employer. As such, national insurance is still payable by both the employer and employee. This is a key difference with salary sacrifice. Salary sacrifice is where salary is given up in lieu of pension contributions from the employer. These, therefore, are employer contributions and do not attract national insurance.

More Bitesize Technical

Employer contributions explained

Learn more about employer contributions. Watch the video here.