Your pension provider or employer uses one of two methods to give you income tax relief on your pension contributions. Understanding which method applies to your pension can affect how much relief you receive — and in some cases, whether you receive any at all.
The Two Methods at a Glance
| Relief at Source | Net Pay Arrangement | |
|---|---|---|
| When relief is applied | After you contribute; provider claims it back from HMRC | Before you pay tax; contribution reduces taxable income |
| Who claims the relief | Provider claims 20%; individual claims extra via self-assessment | Automatic — no action required |
| Non-taxpayers | Receive 20% relief (even if no tax paid) | Receive no relief |
| Low earners under £12,570 | Receive 20% top-up | Receive no relief |
| Higher-rate taxpayers | Must claim extra 20% or 25% via self-assessment | Full relief applied automatically |
| Scottish taxpayers | Must claim extra Scottish differential via self-assessment | Automatic at Scottish marginal rate |
| Typical schemes | Personal pensions, SIPPs, NEST, most insurance-company schemes | Many occupational master trusts, public sector schemes |
How Relief at Source Works — Step by Step
- Your pension provider receives your net contribution (e.g. £80 per month)
- The provider claims 20% basic rate tax from HMRC on your behalf
- £20 is added to your pension pot (making it £100 total)
- If you pay 40% tax, you claim the additional 20% (£20) via self-assessment
- Net effect: £100 in your pension at a personal cost of £60
The key feature: the 20% basic rate top-up applies even if you paid no income tax at all.
How Net Pay Arrangement Works — Step by Step
- Your employer deducts your pension contribution from your gross salary before calculating income tax
- If you earn £3,000/month and contribute £300, you are taxed on £2,700 — not £3,000
- The relief is therefore automatic at your marginal rate
For a higher-rate taxpayer, this is simpler — no self-assessment needed. For a non-taxpayer or someone earning under £12,570, this provides no benefit: they pay no tax either way, so there is no tax reduction to apply.
The Low Earner Problem
A significant number of lower-paid workers — particularly part-time workers — are enrolled in net pay arrangement workplace pensions but earn below the personal allowance (£12,570 in 2026/27). These workers receive:
- 0% pension tax relief under net pay (because they pay no income tax)
- 20% they would receive if their scheme used relief at source
The government introduced a top-up payment for this group from April 2024, paid via HMRC directly to eligible individuals. However, workers need to be on the HMRC radar to receive it, and some may miss out if they do not claim.
Worked Example
Scenario A — Relief at Source: James earns £28,000 and contributes £2,400/year net to his personal pension.
- Provider claims 20%: pot receives £3,000
- James claims extra 0% via self-assessment (he is a basic rate taxpayer): total relief = 20%
- Net cost: £2,400 for £3,000 in pension
Scenario B — Net Pay: James switches jobs. New employer uses a net pay arrangement with the same 20% basic rate.
- £3,000 gross deducted before tax calculated
- James saves £600 in income tax (20% of £3,000)
- Net cost: £2,400 for £3,000 in pension
Result for a basic rate taxpayer: Identical in both cases. The difference only matters for non-taxpayers and higher-rate taxpayers.
Does It Matter Which Scheme Your Employer Uses?
For basic rate (20%) taxpayers: practically no difference. For higher-rate (40%+) taxpayers: net pay is simpler; relief at source requires self-assessment. For non-taxpayers or those under the personal allowance: relief at source is significantly better.
If you are a low earner concerned about pension tax relief, you can supplement your workplace net pay pension with additional voluntary contributions to a personal pension (relief at source), ensuring you receive the 20% top-up on those additional amounts.