What is A Relief At Source Pension? A Comprehensive Guide for UK Taxpayers

As an employee and UK taxpayer, navigating the intricacies of pension schemes can feel a little intimidating. There’s a myriad of technical terms and jargon to work through with numerous schemes and options to consider. Yet, understanding the basics is essential for securing a stable financial future and, most importantly, making sure you get the tax relief that is owed to you. That’s where Tax Owed To You comes in. We are always delighted to help clients claim more of their cash back from the tax man and into their pockets. In the meantime, we trust this introduction to a key aspect of UK pensions proves useful. 

You might encounter the terms "Relief at Source Pension" or “Pension Relief At Source” when talking to your employer or financial advisor.  In this comprehensive guide, we will delve into Relief at Source pensions, exploring what they entail, their benefits, and how they impact your tax obligations. Most importantly, we’ll explain how you might be missing out on money that is owed to you. 

The Basics of Relief at Source Pensions

To encourage employees to plan for the future, for many years, successive UK governments have provided tax relief on pension scheme savings. It’s a little bonus, to ensure we can look after ourselves in our old age.  A Relief at Source Pension is a common pension scheme designed to simplify the process of receiving this relief. Unlike other pension schemes, where the tax relief is claimed back by the individual from HM Revenue and Customs (HMRC), Relief at Source applies the tax relief at the source - within the pension scheme itself. As the scheme owner, tax is calculated and applied by the pension operator and your employer. It all happens at the source so you normally do not need to worry about it. It is a process that ticks over in the background. 

How Pension Tax Relief At Source Works

The mechanics of Relief at Source are relatively straightforward. When you contribute to a pension under this scheme, your pension provider claims back the basic rate of tax from HMRC and adds it to your pension pot. This happens automatically with each contribution, which is normally monthly alongside your salary payment. 

The situation becomes more complex if you pay the higher or alternative rates of tax. If you are a higher-rate taxpayer, you'll be paying 40% tax on all your income over the higher-rate threshold. You can still claim an extra 20% relief on this part of your income if you choose to pay it into your pension. However, this extra relief is not automatically applied. You can claim it back through your tax self-assessment if you complete one but, if you’re a PAYE employee who does not, the process can be more cumbersome.  Fortunately, we can check for you and claim any Tax you’re owed on your behalf. The process takes a few minutes and involves filling in one single form.

Benefits of A Relief At Source Pension Scheme

If you’re lucky enough to have a Relief At Source Pension Scheme, you’re already enjoying several important benefits. If you’re not, perhaps chat with your employer about your options. 

Immediate benefits include;  

• Simplicity and Convenience; Relief at Source Pensions offer a straightforward approach to tax relief. You don't need to go through the process of claiming anything separately; it is normally automatically added to your pension contributions.
• Boost to Contributions:  The additional tax relief provided by the government means more money is going into your pension pot. Over time, this can significantly enhance the overall value of your pension and help you enjoy comfort in later life. 
• Universal Applicability: Relief at Source Pensions are available to all eligible individuals, regardless of their work role or level of income. This makes it an inclusive option for the widest possible range of individual taxpayers.
• Flexibility in Contributions: Pensions vary a great deal, but most allow a combination of employer and employee contributions.  As a Tax Relief At Source Pension Scheme holder, you have the flexibility to contribute varying amounts, in various ways,  to your savings pot. This adaptability is one of the reasons the schemes have proved popular over the years. 

Potential Drawbacks Of A Tax Relief At Source Pension  

Relief At Source Pensions are not for everyone. In the spirit of making an informed decision, there are some downsides that you ought to consider before signing up.  

• Tax on Withdrawals. When you start withdrawing from your pension, the income is subject to income tax. Understanding how withdrawals will impact your overall tax position is crucial for effective retirement planning.
• Carry Forward Rules: Like other pension schemes, Relief at Source Pensions only allows you to carry forward unused annual tax allowance from the three preceding tax years. Otherwise, the benefits are lost. 
• Future Changes in Tax Legislation:  All investments change over time and come with risk. In the case of Relief at Source Pension Schemes, you need to take any potential changes in tax legislation into account. Staying informed about legislative updates becomes essential for making informed financial decisions.

Eligibility for Relief at Source Pensions

Most individuals in the UK are eligible for a Relief at Source Pension. The majority of scheme holders are employed and their schemes have been arranged by employers. The self-employed and those not working but still contributing to a pension can have them too.  To be eligible, the only criteria you need to fulfil are to be under 75 years old and to pay UK tax. Non-taxpayers, such as those with low or no income, can still contribute, but tax relief will not be applicable. Before signing up for any pension, it is advisable to get tailored independent financial advice. 

Once you have a scheme in place, contributing couldn’t be more of a straightforward process. If your scheme is offered by an employer, as most are, your workplace will apply their regular contributions as part of their payroll processing. They will also process any additional contributions you might want to make out of your salary.  It may be that you have a pension scheme directly from a supplier or your Financial Advisor. In this case, you can make contributions independently.  

A Relief At Source Pension Example 

In a Relief at Source Pension, let's say you contribute £80 from your salary. With Basic Rate tax relief, £20 is automatically applied within the pension scheme and added. This makes the total contribution £100. This streamlined process simplifies tax relief, benefiting individuals by boosting their pension contributions effortlessly. 

Higher Rate tax-payers can similarly claim additional tax relief, but this isn’t automatically applied. Here, there are several ways to claim this tax back but the Tax Owed To You service is amongst the quickest. 

Pension Net Pay Vs Pension Relief At Source 

A net pay pension scheme provides an alternative to a relief at source pension. With a net pay scheme, 100% of the employee contributions are deducted from the employee’s gross salary and paid into the pension.  This means that the employee pays tax on their salary after their pension contribution is deducted which is why such pensions are described as ‘net’ schemes. Compared to Relief At Source schemes, higher and additional rate taxpayers  get full tax relief “up front.”

In summary, a Relief at Source Pension is a valuable tool for UK taxpayers seeking a tax-efficient way to save for retirement. Its simplicity, universal applicability, and the automatic ‘top up’ of basic rate tax relief make it an attractive option for many.  However, if you pay a higher rate of tax, getting the full relief you are owed is not necessarily the easiest or most straightforward of processes. The good news is the Tax Owed to You team can help you with it right now. Start by filling out the form on their website.