Net pay vs relief at source: how each pension relief method works

Every relievable pension contribution ends up with income tax relief at the member’s marginal rate — FA 2004 grants the relief either way. What differs between a net pay arrangement and relief at source is the plumbing: where in the payroll and tax system the relief is delivered, who has to claim it, and what happens at the edges. The plumbing is not cosmetic. It decides whether a higher-rate taxpayer receives their full relief automatically, whether a low earner receives any at all, and which figure belongs in an adjusted net income calculation.

Net pay: relief through the payslip

Under a net pay arrangement — the norm in occupational and trust-based schemes — the contribution is deducted from gross pay before PAYE income tax is calculated on the employment income that ITEPA 2003 charges (FA 2004 s.193). Taxable pay falls by the full contribution, so relief arrives at the member’s marginal rate, immediately, with nothing to claim: a 40% taxpayer’s relief is complete in the same payslip. National Insurance, note, is still charged on the full pay — net pay relieves income tax only.

Relief at source: 20% added, the rest reclaimed

Under relief at source — the method personal pensions, SIPPs and most group personal pensions use — the contribution comes out of taxed pay, and the scheme adds basic-rate relief by reclaiming it from HMRC: £80 paid in becomes £100 gross (FA 2004 s.192). That happens for every member, whatever their tax rate. A higher- or additional-rate taxpayer gets the balance by an extension of the basic rate limit equal to the gross contribution (FA 2004 s.192(4)), claimed through Self Assessment or a tax-code adjustment — the mechanics are in how higher-rate pension tax relief works.

Same £600 net cost, same £1,000 in the pension — the two methods converge if the claim is made. The failure mode is specific to relief at source: the s.192(4) band extension does not happen by itself, and a higher-rate taxpayer who never files the claim permanently leaves the second £200 with HMRC.

FA 2004 s.192, s.192(4), s.193 · ITEPA 2003 (PAYE employment income).

The low-earner anomaly — and the s.193A top-up

At the bottom of the income scale the two methods used to give different answers. An employee earning below the £12,570 personal allowance pays no income tax, so a net pay deduction has nothing to relieve: the contribution costs its full face value. The same contribution under relief at source still gets the 20% added — s.192 grosses up regardless of the tax actually paid. For each £100 landing in the pension, the relief-at-source member paid £80; the net-pay member paid £100.

From the 2024-25 tax year that gap is closed by statute: HMRC pays low earners in net-pay schemes a top-up equal to the basic-rate relief an equivalent relief-at-source saver would have received (FA 2004 s.193A, inserted by the Finance Act 2022). The top-up is paid direct to the individual after the tax year end — it equalises the cost, but it arrives later and outside the pension.

FA 2004 s.193A (Finance Act 2022) — top-up for net-pay low earners, 2024-25 onwards.

Salary sacrifice: the third route

There is a third mechanic that is neither of these: give up salary and have the employer pay it into the pension as an employer contribution. No relief is claimed because the pay was never received — and unlike both net pay and relief at source, the sacrificed amount escapes National Insurance as well as income tax (SSCBA 1992 s.8, and the employer’s s.9 saving besides). What is salary sacrifice covers the mechanics and the catches.

Which figure goes into an adjusted net income calculation

The plumbing matters one more time when adjusted net income is computed for the £100,000 personal-allowance taper (ITA 2007 s.35) or the child benefit charge. Under ITA 2007 s.58, grossed-up relief-at-source contributions are deducted in the ANI calculation — £800 paid means £1,000 comes off. Net-pay contributions are not deducted again: they already left taxable pay before the P60 figure was struck, and deducting them a second time double-counts the relief. Sacrificed salary needs no adjustment either — it was never income. Getting the wrong figure in the wrong box is the most common ANI error in both directions; the adjusted net income calculator asks for each contribution type separately for exactly this reason.

ITA 2007 s.58 (adjusted net income) · ITA 2007 s.35 (personal-allowance taper).