RPSM05101310 - Technical Pages: Contributions and tax relief: Member contributions: Methods of claiming tax relief: The different methods

The different methods of giving tax relief

There are 3 methods by which a member can receive tax relief on their relievablepension contributions. A member cannot choose which method of tax relief applies to their contributions; this is determined by the method the pension scheme is allowed to operate under the legislation (see RPSM05101320 to RPSM05101370).

Relief at source (RAS)

Relief at source operates by allowing an individual to make their relievable pension contribution after deducting a sum equal to the basic rate of income tax. The schemeadministrator may then claim from HMRC a repayment of the sum deducted.

A member who wishes to make a relievable pension contribution of £100 would actually pay £80 to the pension scheme (£100 – £20, using the current basic rate of tax of 20%). The scheme administrator will then be entitled to claim the £20 deducted by the member from HMRC and will credit the member with a contribution of £100.

A member who is a higher rate taxpayer can obtain higher rate tax relief, generally by making a claim on their Self Assessment return. Relief is given by extending the member’s basic rate limit by the amount of the contributions.

RAS is the mechanism by which a member who is entitled to tax relief on a maximum of £3,600 of contributions because they either:

• have no relevant UK earnings chargeable to tax, or
• their relevant UK earnings chargeable to tax are less than the basic amount of £3,600,

is able to obtain this tax relief.

Net pay arrangements

Net pay operates where the employer deducts the relievable pension contributions from an employee’s employment taxable income before operating PAYE. In this way the individual employee gets tax relief at their marginal rate of income tax without needing to make an additional claim – unless, exceptionally, full relief cannot be given through the operation of net pay.

So where a member wishes to make a relievable pension contribution of £100 the employer will deduct £100 from the member’s employment income and pay £100 into the pension scheme.

Relief on making a claim

Relief by way of a claim operates where the member makes contributions to a pension scheme and claims tax relief from HMRC on their relievable pension contributions. No relief is given when the contribution is paid.

So where a member wishes to make a relievable pension contribution of £100, £100 will be paid to the pension scheme. The member then claims the tax relief from HMRC. Relief is given by way of a deduction from the member’s total income.