Simplification is the key - Centre for Policy Studies

APPENDIX IV
TAX RELIEF MECHANICS 170
Tax relief for pension saving is delivered in one of three different ways.
1. Tax relief at source
Relief at source typically applies to contributions made to personal pensions. The saver
contributes £80 into his personal pension, which then receives basic rate of income tax
(£20) from HMRC, so £100 ends up in the pension pot. Higher rate taxpayers then claims
£20 via their Self Assessment tax return (or through a PAYE coding adjustment), so the
net cost is £80 - £20 = £60.
2. Relief through net pay arrangements, via the payroll
Employee contributions to occupational pension schemes are normally given tax relief
via net pay arrangements. The employer deducts an employee’s pension contributions
from their income before operating Pay As You Earn (PAYE) to collect income tax. This
means that PAYE is operated on their net pay. This automatically delivers tax relief at an
individual’s marginal rate of tax.
3. Via a claim on the tax return
Some pension contributions are not tax-relieved at all on payment. The saver pays the
full amount of their pension contribution from taxed income and claims back the tax
relief from HMRC. Thus a saver making a £100 contribution into an AVC scheme from
post-tax income would subsequently claim back £20 (basic rate taxpayer) or £40 (higher
rate taxpayer) from HMRC, for a net cost of £80 or £60, respectively.
170 HMT & HMRC: Implementing the restriction of pensions tax relief, December 2009.
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