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To be eligible for tax relief you first need to enrol for pension, which is normally done through your employer. If you are aged between 22 and state pension age and earn more than £10,000 per year, then you will be automatically enrolled for workplace pension by your employer. But if you are under 22 or earn less then £10,000 you can still join the workplace pension, but this is optional to you. As of now, the pension contribution is 8% on your pensionable earnings in which the employee contributes 5% and the employer 3%.
Pensionable Earnings are the earnings on which the above 5% & 3% pension rates apply. Some employers use the total gross pay as pensionable earnings while others use Gross Pay minus £6,240 (pension free earning limit) as pensionable earnings. For example, if you earn £30,000 for the year, your pensionable earnings would be £23,760 (£30,000 – £6,240).
The tax relief on pension contribution made is the money that would have gone to HMRC as PAYE Income Tax is paid into your pension pot instead. The amount of tax relief you can get depends on the method which your employer used to work out your Pension Contributions. Being an employee, you cannot choose the method type as it is uniform for the whole organisation. But you can ask the HR department or accounts department whoever does the payroll for your employer to find out which method is being used to work out pension contributions.
The two methods to work out Pension contributions and hence tax relief are:
This is the most used method to work out pension contributions for employees. The way this method works:
Under this method, if you do not pay tax because you earn less then tax-free annual allowance you can still get the 20% relief towards your pension contribution.
As under this method, you pay 80% towards pension and the Pension provider claims 20% from the government. Therefore, the people whose earnings fall under higher rate or additional rate tax band, have to claim additional tax relief separately, either through their self-assessment tax return if they file one or by contacting HMRC.
Under this method, you do not have to make a separate claim for additional relief if you are a higher or additional rate taxpayer. So, it does not matter what band your income falls under as you get the relief before you pay for your PAYE Income Tax.
The way pension contribution works under this method:
Under this method, if you do not pay tax because you earn less then tax-free annual allowance your take-home salary is reduced as you contribute in full towards your pension and cannot get the 20% top-up from the government. You can ask your employer to top up, but they are not legally binding to do that.
If you still have any questions or being a start-up company and not sure which method to go for, please feel free to get in touch and we will advise you of the best possible solution after reviewing your situation. Our initial consultation is always free.