Two employees on identical salaries, paying identical pension contributions into identically good schemes, can end up with different amounts in their pots and different tax bills. The reason is administrative: their employers chose different methods of giving tax relief. Relief at source and net pay arrive at the same answer for most people and at materially different answers for two groups — the lowest earners and the highest.
How each method works
Under relief at source, the employee's contribution is deducted from pay after tax. The pension provider then reclaims basic rate relief from HMRC and adds it to the pot: pay £80 and the provider adds £20, making £100 invested. Personal pensions, SIPPs and most master trusts — including the largest auto-enrolment providers — work this way.
Under a net pay arrangement, the contribution is deducted from gross pay before tax is calculated. The employee's taxable pay is reduced, so relief is given immediately at their marginal rate and nothing is reclaimed from HMRC. Most occupational and defined benefit schemes operate this way. One caveat on the arithmetic that follows: relief "at their marginal rate" means the rates that apply to them, and a Scottish taxpayer has a different band structure, so the higher-rate figures in this guide are those for England, Wales and Northern Ireland.
For a basic rate taxpayer the outcome is identical. The difference appears at both ends of the income scale.
The low earner problem
Someone earning below the personal allowance pays no income tax. Under relief at source, they still get the 20% top-up — the provider reclaims it regardless of whether the individual actually paid any tax. Under a net pay arrangement, there is no tax to relieve, so the payroll gives them nothing and their contribution costs them the full amount. They are not left entirely without a remedy — a government top-up now compensates affected net pay members — but it arrives after the tax year ends rather than through the payslip, which is the distinction the next section draws out.
On a typical auto-enrolment contribution this is worth a meaningful sum each year to a part-time worker, and the difference is invisible on a payslip. It disproportionately affects lower-paid and part-time workers — and it is entirely a consequence of which scheme their employer picked. Government has introduced a top-up mechanism to compensate affected net pay members, paid after the end of the tax year, but it operates retrospectively rather than fixing the payroll.
For an employer with a substantial low-paid workforce, the scheme's relief method is therefore a genuine remuneration decision, not a back-office detail.
The higher earner problem
The mirror image affects the top. Under a net pay arrangement, a higher or additional rate taxpayer gets full relief automatically — the contribution comes out of gross pay, so 40% or 45% relief is given in the payroll.
Under relief at source, only basic rate relief is added by the provider. The extra 20 or 25 points has to be claimed, through the tax return or by contacting HMRC. A great many higher rate taxpayers in relief at source schemes never claim it, and it is one of the most commonly unclaimed reliefs in the system. Claims can normally be backdated four years, which makes this worth checking rather than assuming.
Two adjacent points matter for anyone near £100,000. Pension contributions reduce adjusted net income, which is what drives the personal allowance taper — so a contribution made in the 60% effective band is relieved at that rate. And they reduce threshold income for the pension annual allowance taper, which can preserve the full allowance for someone otherwise caught.
Salary sacrifice sits outside both
The third method is not a relief mechanism at all. Under salary sacrifice, the employee gives up salary in exchange for an employer pension contribution. The money never becomes their pay, so there is no relief to give — and no National Insurance on the sacrificed amount, for either party.
That is the decisive advantage: the employee saves 8% or 2% employee National Insurance, and the employer saves 15%, which many employers pass into the contribution. For an employer with a substantial pension bill the saving is material, and it is the single most common reason schemes are restructured.
The constraints are real: the arrangement must be documented before entitlement to the pay arises, the reduced salary is the figure used for mortgage applications and some statutory payments, and pay cannot be sacrificed below the national minimum wage. A cap on the National Insurance advantage on sacrificed pension contributions has been announced for the end of the decade, which argues for making use of it while the arithmetic holds rather than deferring the decision.
What to check
Employers should know which method their scheme uses and whether it fits their workforce — relief at source where a significant proportion of staff earn below the personal allowance, net pay where the population is predominantly higher rate and salary sacrifice is not in place. Where sacrifice is available, model it, because it usually beats both.
Employees should check one thing: whether their scheme is relief at source and whether they pay higher rate tax. If both are true and they have never claimed the extra relief, there is money sitting with HMRC, recoverable for several years back.
Acumon advises on scheme design, sacrifice documentation and the payroll mechanics through auto-enrolment and payroll management work, with the personal claims handled through self assessment. If your scheme uses net pay and a third of your staff earn under the personal allowance, that is a review worth doing.