Relief at Source vs Net Pay: Which Scheme Are You In?

Two Ways Pensions Handle Tax Relief

Every UK pension scheme uses one of two methods to apply tax relief on your contributions: relief at source or net pay. The method your scheme uses affects how you receive tax relief, whether you need to make a separate claim, and – for some earners – how much relief you actually get.

You do not get to choose which method applies. The scheme administrator decides, and it is built into how the scheme operates. However, understanding the difference is crucial because it determines what action you may need to take to get your full entitlement.

How Relief at Source Works

Under relief at source, your pension contributions are taken from your after-tax pay. Your pension provider then claims 20% basic rate tax relief from HMRC and adds it directly to your pension pot.

Here is how the process works in practice:

1. You earn your salary and pay income tax and National Insurance through PAYE as normal
2. Your pension contribution is deducted from your take-home (net) pay
3. Your pension provider adds 25% to your net contribution (equivalent to 20% of the gross amount)
4. If you pay tax above 20%, you must claim the extra relief separately through Self Assessment or by contacting HMRC

Who uses relief at source?

• Most personal pensions and SIPPs
• Some workplace defined contribution schemes (particularly those run by insurance companies)
• Stakeholder pensions
• The National Employment Savings Trust (NEST)

How Net Pay Works

Under a net pay arrangement, your pension contributions are deducted from your salary before income tax is calculated. This means you automatically receive tax relief at your full marginal rate through payroll, with no need for a separate claim.

The process works as follows:

1. Your employer deducts your pension contribution from your gross salary
2. Income tax is then calculated on the reduced salary
3. Because your taxable pay is lower, you pay less tax – this is the tax relief
4. National Insurance is still calculated on the full salary (unless salary sacrifice applies)

Who uses net pay?

• Most public sector pension schemes (NHS, teachers, civil service, police, fire service, local government)
• Many large private sector defined benefit (final salary) schemes
• Some workplace defined contribution schemes

Side-by-Side Comparison

How to Check Which Scheme You Are In

There are several ways to determine whether your pension operates on relief at source or net pay:

Check your payslip

This is the quickest method. Look at where the pension deduction appears relative to the tax calculation:

• If your pension contribution reduces your taxable pay (shown before the tax line), you are on net pay
• If your pension contribution is deducted after tax has been calculated (from your take-home pay), you are on relief at source

Check your pension statement

Your annual pension statement may show contributions with a separate line for tax relief added. If you see a 20% top-up line, you are on relief at source. If contributions match exactly what was deducted from your pay, you are likely on net pay.

Ask your employer or pension provider

If you are still unsure, your HR department or pension provider can confirm which method the scheme uses.

The Impact on Different Taxpayers

Basic rate taxpayers (20%)

For basic rate taxpayers, both methods produce the same result. Under relief at source, the provider claims 20% and adds it to your pot. Under net pay, your taxable income is reduced by the full contribution, saving you 20% in tax. The outcome is identical.

Higher and additional rate taxpayers

This is where the methods diverge significantly. Under net pay, a 40% taxpayer gets full 40% relief automatically. Under relief at source, only 20% is added automatically – the remaining 20% must be claimed back. Many people fail to claim this extra relief, effectively donating money to HMRC.

Low earners below the personal allowance

This group was historically disadvantaged by the net pay anomaly. Under relief at source, everyone gets the 20% top-up regardless of whether they pay income tax. Under net pay, if you earn below the personal allowance (£12,570), there is no tax to save, so you received no relief at all. From April 2025, HMRC introduced automatic top-up payments to address this issue.

Salary Sacrifice: A Third Option

Salary sacrifice is not a tax relief method in the same sense, but it is worth understanding alongside relief at source and net pay. Under salary sacrifice, you agree to a lower contractual salary in exchange for higher employer pension contributions.

The key advantage is that salary sacrifice saves both income tax and employee National Insurance contributions (currently 8%), making it more tax-efficient than either relief at source or net pay for most earners. The employer also saves 13.8% employer NICs, which some employers pass on as additional pension contributions.

For more on pension contributions and salary sacrifice, see our pension contributions guide.

What If You Have Multiple Pensions?

It is perfectly possible to have pensions using different tax relief methods. For example, you might have a workplace defined benefit pension using net pay and a personal SIPP using relief at source. In this case:

• Your workplace contributions receive automatic relief through payroll
• Your SIPP provider claims 20% basic rate relief from HMRC
• If you are a higher rate taxpayer, you need to claim extra relief on your SIPP contributions through Self Assessment
• All contributions from both pensions count towards your combined annual allowance of £60,000

Practical Tips

1. Identify your scheme type today – check your payslip or ask your provider
2. If you are on relief at source and pay higher rate tax – make sure you claim the extra relief every year
3. If you are on net pay and earn below the personal allowance – check that you are receiving the HMRC top-up payment introduced in April 2025
4. Consider salary sacrifice if available – it may save you more than either standard method
5. Keep records of all contributions – you may need them for Self Assessment claims or HMRC queries