TQOTW: Pension Deductions

We have received many queries from payroll departments on how to process refunds of pension contributions when auto-enrolment and opting out span a tax year. There is also some confusion about relief at source and net pay pension schemes so we hope this article helps all those clients processing payrolls.

A newly established Ltd Company who recently registered for PAYE now had to comply with Auto Enrolment duties and so began the auto-enrolment process for all eligible employees in March 2019 (Pensions Act 2008 section 3).  The client was unsure how refunded contributions should be processed in the April payroll should any employee chose to opt out. (Pensions Act 2008 section 8).

Paragraph 44 of Pensions Regulator Detailed guidance for Employers states:

When an employer is given a valid opt-out notice, they must refund to the jobholder any contributions that have been deducted from pay (less any tax due) by the refund date, which is either:

  • within one month of being given the valid opt-out notice, or in the next available payroll run after they were given the notice”.

 As any potential refunds would fall into the new tax year, the client asked if an Earlier Year Update (EYU) would need to be processed for the employees concerned to correct the taxable year to date position.  The client was advised that an EYU would not be due as the employer was operating a scheme which gives relief at source – this means that the relief is actually given when the pension is paid to the pension fund – it will be ‘grossed up’ in the fund – relief at source does not mean relief through the payroll.  As Employees’ contributions are simply deducted from net pay, the refund would be processed as a net adjustment.

If the client had been operating a net pay arrangement, then contributions would be deducted from gross pay before tax – thus giving tax relief (but not NICs relief) through the payroll.  Such schemes would normally only be operated in large organisations and need HMRC approval. Even if the client had been operating a net pay scheme it would have been acceptable to process the refund in April payroll as additional gross pay adjustment without the need to process an EYU.

In summary, a ‘relief at source’ pension scheme means that employees’ contributions are deducted from Net Pay and receive basic rate tax relief when the pension contributions are paid to the pension fund.  A ‘net pay scheme’ means that employees’ contributions are deducted from Gross pay before tax.

In either case, there would be no requirement for Earlier Year Updates when refunding employee contributions following an opt-out and following HMRC changes to RTI submissions the EYU ceased to be a valid submission after 19th April 2019 however EYU’s will still be accepted for the 2018-2019 tax year.


Please share this article with your clients


If you have a tax query, why not contact the Tax Advice Line on 0844 892 2470 to discuss it. Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates.

Back to Community
TQOTW: Pension Annual Allowance
TQOTW: EU Fifth Money Laundering Directive
TQOTW: SDLT Higher Rates Transaction