You are here: Home - Retirement - Retirement planning - News -

Part-timers & low earners: why it matters how your employer sets up your pension

0
Written by: Paloma Kubiak
27/04/2017
The way your employer sets up and administers your pension affects the amount of money you’ll be able to take home, with one method being more beneficial to part-timers and low earners than the other.

If your employer offers a workplace pension, it has a choice of two tax-relief arrangements that apply to employee contributions.

There is a small, but very significant difference, in the two options which means that although you’ll be contributing the exact same amount of money into your pension, the amount of take-home pay will vary. As a result a person in one scheme may have less money each month than someone else, whose employer comes under the alternative tax-relief arrangement.

The issue particularly affects part-time workers and low earners who earn under £11,500.

The two tax-relief arrangements explained

An employer has a choice of two tax-relief arrangements that apply to employees’ contributions:

  • Net pay arrangement: this is where the employer takes an employee’s pension contribution from their pay before it’s taxed (gross) so employees get full tax relief unless they don’t pay tax.
  • Relief at source: this is where the employer takes an employee’s pension contributions after taking tax from pay. The pension provider then adds 20% tax relief to pension pots.

Why are part-timers and low-earners impacted?

It’s almost a mis-alignment or gap between two different thresholds set by the government.

The first relates to the pension auto-enrolment scheme. In order for employees to be eligible, they need to earn at least £10,000 a year from a single job.

And as part of the personal allowance – the amount of income you can earn before you start paying tax – the figure stands at £11,500 for the 2017/18 tax year.

As a result, anyone earning between £10,000 and £11,500 is affected.

Under the net pay arrangement, lower paid workers don’t qualify for tax relief as the earnings are below the annual income tax personal allowance.

But under the relief at source arrangement, while the same contribution amount is taken, the other is taken less the tax relief which is reclaimed by the pension scheme.

Keith Gorbutt, technical manager at Dentons Pensions, says while employees under either arrangement fall below the income tax threshold of £11,500, the net pay arrangement “is a very unfair way of deducting pension contribution for the low earner and part-time worker”.

Gorbutt gives the following calculations to explain the difference:

Under a net pay arrangement, an employee earning £10,400 (£200 a week), paying a 1% pension contribution will have the full £2 a week deducted from their pay which is paid into their pension. They can’t claim any money back from HM Revenue & Customs (HMRC) and so will have less take home pay as a result.

Under the relief at source arrangement, an employee earning £10,400 (£200 a week), would have £1.60 a week deducted from their pay and paid into their pension. The scheme would then claim the 40p from HMRC, so that a total of £2 a week is paid into the pension.

For someone earning £11,000 (£211 a week) paying a 1% contribution, under a net pay arrangement they would have £2.11 a week deducted from their pay. Again, no money can be reclaimed from HMRC. But under the relief at source arrangement, the employee would only need to contribute £1.69 a week while the scheme would claim 42p from HMRC, so a total of £2.11 per week is paid into the pension.

Looking at the annual take home pay based on an £11,000 salary, under net pay an employee would have take home pay of £10,890.28, while under relief at source they would be left with a higher £10,912.12.

It’s important to speak to your employer

Auto-enrolment is entering the last phase, where the smallest and newest employers will need to offer a workplace pension scheme.

Gorbutt says it’s down to employers discretion as to how the pension scheme payments are made, which is why the employer should seek financial advice when setting up the scheme which is to the benefit of all employees.

He says: “For the very low paid part-time employee the most tax advantageous form of payment contribution would be relief at source, as a net pay arrangement would almost certainly affect their take home pay of the low paid.

“The employer when setting up the scheme with advisers should look at the employee demographic and ensure that the method of paying pension contributions doesn’t impact low paid workers’ take home pay.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Are you a first-time buyer looking for a mortgage?

Look no further, get the help you need by searching for your perfect mortgage

Insurance Experts: Are you fully insured? Click here to get a quote.

For a free quote or to speak with an insurance expert call 0800 1218744

Santander launches premium current accounts with added perks

Santander has launched current accounts for ‘select’ and ‘private’ customers, offering enhanced features for a...

BUDGET 2017: Personal allowance and minimum wage to rise next year

The personal allowance and minimum wage rates will rise from April 2018, the Chancellor of the Exchequer annou...

Married couples set to claim £900 tax break

Eligible married couples will be able to claim a tax break totalling £900 via the Marriage Allowance.

Ryanair jetting towards US flights for £10

Ryanair is on course to achieve its long-held ambition of offering transatlantic flights to the US – and the...

Investing in car parks: a good vehicle for income seekers?

As the search for income continues, many investors are turning to alternatives, with car parks becoming increa...

Tesco expected to post significant write-offs

Tesco is predicted to unveil the biggest loss in its 100-year history, according to analysts.

Results round-up: Companies to watch this week

Mulberry and more will face the music this week.

Product launches of the week

Select Property Group, Schroders, Leeds Building Society and more have exciting news this week.

Investing your money

Alliance Trust Plc gives you smart insight into how to invest your money

Money Tips of the Week

Read previous post:
2260766-marksandspencer2
M&S Bank offers new current account switchers £185 gift card

M&S Bank has introduced a current account switch incentive giving new customers the chance to earn up to £185 in...

Close