Showing posts with label net pay arrangement. Show all posts
Showing posts with label net pay arrangement. Show all posts

Thursday, November 7, 2019

The different types of Pension in the UK

Before 2012, Pension Contributions were optional and for a lot of people who had never contributed to private pensions, the State Pension paid by National Insurance Contributions (currently at £130 per week if you have 30 qualifying years) was not enough to live on.  Automatic enrolment changed this, making it compulsory for employers to automatically enrol their eligible workers into a pension scheme. Currently employees need to contribute 5% of their qualifying earnings and employers 3% (at a minimum), the objective being to supplement (and potentially replace) a State Pension that cannot cope anymore with the changes in demographics.

But not every scheme behaves the same. And it's important to understand the difference between the different schemes because some of them require that you take an extra step to claim the full tax benefits you're entitled to as failure to do so means that you will leave significant tax savings on the table.

There are basically 3 schemes available:

1. Tax relief at source

This is the most common scheme. It's used by the government owned Nest scheme as well as People's Pension. It works the same way as if you were paying yourself directly into a Private Pension: whatever is put in your pension, the HMRC adds 20% to it. In other words, only 80% of your pension contribution is deducted from your after tax salary on your payslip and it means that even if you don't pay tax (because your income is below the personal allowance), you get an pension relief of 20%. The downside however is you only ever get 20% relief even if you are entitled higher relief because you are a higher rate taxpayer.