There are a number of ways in which higher earners regularly fail to maximise the benefits of their employer’s pension scheme that I come across quite often.

 

NOT CLAIMING HIGHER RATE TAX RELIEF ON EMPLOYEE PENSION CONTRIBUTIONS

 

In my book this one is a cardinal sin although it is easy to see how it can be overlooked.

The key question is does your employer operate a relief at source or a net pay scheme?

 

There are two different ways that employees can obtain tax relief on their pension contributions to defined contribution pension schemes and the pension scheme will be set up to take one or the other:

 

GROSS PAY OR RELIEF AT SOURCE

In a relief at source scheme:

• Employee Contributions: These are deducted from your net salary, which means they come out after tax has been deducted under PAYE (Pay As You Earn).
• Tax Relief: The pension scheme adds basic rate tax relief (20%) to your contributions. For instance, if you contribute £80, the pension scheme adds £20, making the total contribution £100.
• Higher Rate Tax Relief: If you’re a higher rate taxpayer (earning over £50,000), you can claim additional tax relief through your tax return or by directly contacting HMRC. This is often overlooked but crucial for maximizing savings.
• Claim Period: You have up to four years from the end of the tax year to claim any overpaid tax.

 

NET PAY

In a net pay scheme:

• Employee Contributions: These are deducted from your gross salary before tax, meaning you pay Income Tax on the remainder after the pension contribution.
• Automatic Tax Relief: You receive tax relief at your highest rate of Income Tax automatically, as your taxable salary is reduced by the amount of your pension contribution.

 

SALARY SACRIFICE FOR PENSIONS

• Definition: Salary sacrifice involves agreeing to a reduction in your gross earnings equal to your pension contributions. In return, your employer contributes more to your pension fund.
• National Insurance Contributions (NIC): Both you and your employer pay less Class 1 NIC because the sacrificed salary is not subject to NIC, and employer contributions are NIC-free.
• Flexibility: Salary sacrifice can be beneficial regardless of whether your pension scheme operates on a net pay or relief at source basis, offering potential savings and enhancing your retirement provisions.

 

 

FAILING TO JOIN YOUR EMPLOYER’S PENSION SCHEME

There is virtually no excuse for not joining an employer’s workplace pension scheme especially if you are a higher earner apart from some short term exceptional circumstances.  Your employer is legally bound to a) offer you a workplace pension scheme to join and b) pay employer contributions into the scheme of at least 3% of your salary.  Get this – it’s free money and it’s a tax-free benefit in kind!  What’s not to like about it?

I once knew a high earning individual 15 years ago who was offered an employer’s pension scheme to join with employer pension contributions only at a rate of 10% of their salary and zero employee contributions.  This individual was earning a six figure salary.  The person failed to join the pension scheme!  To this day I find it incomprehensible why anyone would not join such a pension scheme.  As the saying goes “There’s nowt as queer as folk.”

So follow the tips from this blog to maximise the benefits of your employer’s pension scheme as a higher earner. You know it makes sense.*

 

 

*RISK WARNING

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits.

You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate tax planning, estate planning, or trusts.  This blog is based on my own observations and opinions.