Pension Schemes - Frequently Asked Questions

Tax Relief

Occupational Schemes

Q. How do I set up a net pay system for my pension scheme?

A. This is a matter for the Schedule E tax district which is responsible for the employer's tax affairs and they will be able to provide you with IR booklet CWG 2 (2000) Employers Further Guide to PAYE and NICs which will give you advice on the net pay arrangement system.


Q. Will the SPSS answer queries regarding my personal tax affairs?

A. These matters should be directed to your own local tax office. For example the SPSS cannot answer enquiries regarding the taxation of a pension from an occupational pension scheme or the tax relief that has been given on contributions to this type of scheme.


Q How is tax relief given on an employer's pension contributions?

A. This is usually done through a net pay system. If one has not been set up in your case, please see the answer given to Question 1 above.

Q. How is tax relief given on loan interest payments received by a pension scheme from a company?

A. Prior to 1 October 2002 companies were required to deduct income tax from the interest payments made to pension schemes, if the term of the loan was for more than 364 days. The scheme had to claim relief from its tax office.

Section 94 of the Finance Act 2002 introduced changes to Section 349 ICTA 1988. There is now no requirement for a borrowing company to deduct tax from interest payments, paid to the scheme administrator, on or after 1 October 2002 in respect of a loan made from an approved pension scheme. The new provisions apply regardless of the length of the loan, and date on which the loan was made.

Personal Pensions

Q. I am a higher rate tax payer. How do I go about claiming the balance of tax relief due to me?

A.Form PP120 mentioned in the current answer is obsolete. I understand that taxpayers can now tick the relevant box on form PP43(CB), which their Pension Providers send them, and return it to their tax office.

Public Sector Schemes

Q. How much tax relief am I entitled to on contributions to my scheme? Can I go back to previous tax years and use up the balance of any unused relief?

A. Tax relief on members' contributions to occupational pension schemes is limited to 15% of earnings (from the employment being pensioned) in the tax year in which the contributions are paid. This limit is imposed by section 592(8) ICTA 1988 (approved schemes) and section 594(2) ICTA 1988 (statutory schemes).

Contributions must be dealt with by the Inspector of Taxes in the tax year in which they are actually paid and relief from other years cannot be used. Once the 15% allowance has been used up there is no more relief allowable. So if a contribution is paid which exceeds 15% of salary for the year, the balance over the 15% will not attract any relief. Unlike with personal pensions, unused relief from previous years cannot be brought forward for use in another tax year.


Q. I have paid a lump sum contribution into my scheme. Am I entitled to tax relief and if so how do I obtain it?

A. Tax relief is allowed on total contributions you pay in any tax year which fall within the 15% earnings limit. You are automatically given full tax relief through the PAYE system on normal compulsory contributions deducted from your salary. But where you pay a lump sum, relief is not automatically given and the onus is on you to claim it.

Your scheme administrator should give you a letter showing the date and amount of any lump sum contributions. If you do not complete an annual tax return, send a copy of the letter to your tax office and ask them to allow you the tax relief. You will receive it at the end of the tax year. (Your tax office is shown on your notice of PAYE coding, or your employer can give you details.)

If you are required to complete a Self Assessment tax return you must keep the letter from the administrator and claim any further tax relief yourself on your tax return. See main question 14 on the return and complete box 14.16. (That is the box number on the return for the year ended 5.4.00 - numbers may change slightly for future years.) Read the matching guidance note carefully - you are responsible for only claiming tax relief within the 15% limit, even if your scheme rules have allowed you to pay contributions in excess of that. You must remember to take account of any normal contributions paid during the same tax year for which you have received relief through PAYE before calculating any further relief due on lump sum contributions. You can ask the tax office for advice.


Q. I have been made redundant by my employer and given some compensation. How will this be taxed?

A. Redundancy compensation is compensation for loss of office. It is not a retirement benefit. Redundancy benefits should not therefore be paid through an approved or statutory pension scheme. Although not for us, we do get a number of enquiries in this area. Enquiries about the tax treatment of redundancy compensation should be referred to the customer's tax office.

Top