There are two different ways your employees can obtain tax relief on their pension contributions to defined contribution (DC) pension schemes.
Cushon Master Trust is set up on a Net Pay arrangement, this is commonly used for occupational pension schemes.
An employer deducts gross contributions from an employees’ gross pay before calculating income tax using Pay As You Earn (PAYE).
This way your employees should get tax relief at their highest marginal rate.
If an employee does not earn enough to pay income tax, they won’t get any tax relief. When submitted to the scheme provider, there is no tax relief claimed from HM Revenue and Customs (HMRC).
Here’s an example: Alex pays 20% tax. £10 goes from his wages into his pension pot, before any tax is taken. This reduces his taxable earnings by £10 and he pays £2 less in income tax.
This means he has received £2 tax relief from the government. His take-home pay is reduced by £8 but £10 has gone into his pension pot. Employees earning less than £12,570 (April 2022) won’t receive tax relief under the net pay arrangement because they don’t earn enough to pay tax.