Making the correct contributions to employee pension plans

26 August 2021
Incorrect employee contributions are being paid to employees’ pension plans on some of our Group Personal Pension and Group Stakeholder Pension schemes.

This results in double pension tax relief being claimed and the wrong amount being paid into the employee pension plan. 

To make sure this doesn't happen it’s essential that both employee contributions are deducted and payroll systems are set up the correct way. 

We're therefore asking all employers and payroll managers to check their payroll software is:

  • Designed to carry out deduction of pension contributions on a relief at source basis.
  • Set up to ensure any updates to the software do not inadvertently affect the configuration.

If anyone else manages their payroll we've asked that they check and confirm the payroll software or process works with the pension scheme and the basis for deductions is correct.  

How does my client make the correct contributions?

If their Group Personal Pension or Group Stakeholder Pension scheme:

Includes a salary exchange arrangement 

They'll need to calculate the employee contributions before income tax and national insurance have been deducted.  They should then add this contribution to their employer contribution and upload it each month.  This ensures no further tax relief is claimed by Royal London on their employee’s behalf.

For example, if the employee contributes 10% of their gross monthly salary of £2,000, the employee contribution of £200 is added to the employer contribution and uploaded to the pension scheme for that month as an employer only contribution.

Doesn't include a salary exchange arrangement 

They'll need to calculate the employee contributions after income tax has been deducted. They can then upload this contribution each month and we’ll apply 20% tax relief to it, which we'll claim back from HMRC. If any of your clients' employees pay higher or additional rate tax they’ll need to claim any additional tax relief direct from HMRC.

For example, if the employee contributes 10% of their gross monthly salary of £2,000 into their pension plan, their employee contribution of £160 (£200 less basic rate income tax of 20%) is uploaded to the pension scheme alongside any employer contribution expected for that month. 

We'll then make a claim to HMRC for the pension tax relief of 20% (£40) and add this to the employee’s net contribution of £160 to make a gross pension contribution of £200.

Avoiding double pension tax relief 

Please note we can’t accept employee contributions deducted on a net pay basis, which means before income tax has been deducted but after National Insurance. This would result in excess tax relief being claimed that would have to be paid back.

Further information

If you have any questions or would like more information speak to your usual Royal London contact. If your clients have any questions they should contact their Servicing Team to discuss.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.