Under a net pay arrangement the employer takes the pension contribution out of gross pay before PAYE is worked out, so relief is given automatically at the member’s top rate of tax. Under relief at source the member pays in after deducting basic rate tax, the scheme reclaims that 20% from HMRC, and higher and additional rate taxpayers must claim the rest themselves. For most basic rate taxpayers the result is the same; the differences show up for people earning below the personal allowance and for higher earners who do not claim.

How does relief at source work?

Relief at source is set out in section 192 of the Finance Act 2004. When a member pays a contribution, they are entitled to deduct and keep a sum equal to income tax on the contribution at “the relevant rate”. The scheme administrator then reclaims that amount from HMRC and adds it to the pension pot. The relevant rate is the basic rate for taxpayers in England and Northern Ireland, the Welsh basic rate for Welsh taxpayers and the Scottish basic rate for Scottish taxpayers (section 192(1A)).

HMRC’s example at PTM044220: a member who wants £100 a month to go into the scheme pays £80, and the scheme claims £20 from HMRC. The £100 is the member’s gross contribution for every tax purpose.

Relief at source is the default method. All personal and stakeholder pensions use it, and so do some workplace schemes. Before the first contribution the member, or the employer on automatic enrolment, must give the scheme their name, address, date of birth, National Insurance number and employment status and make declarations, including that total contributions will not exceed the higher of £3,600 or their relevant UK earnings. Anyone else, such as a parent or spouse, can also pay in net of basic rate tax, but only the member can claim any higher rate relief on that third party payment.

How does a net pay arrangement work?

Under section 193 of the Finance Act 2004 the employer deducts the contribution from the member’s pay before tax and operates PAYE on what is left. If the contribution is £100, £100 leaves the pay packet and £100 goes into the scheme. Relief is given straight away at whatever rate the member pays, and the member does nothing.

Net pay is only available in two situations (PTM044230):

  • an occupational pension scheme, where the member is an employee of a sponsoring employer and every other contributing employee of that employer in the scheme is also on net pay, or
  • a public service pension scheme or a marine pilots’ benefit fund, for employee members.

An employer cannot put some employees on net pay and others on relief at source in the same scheme. A member cannot choose the method either; it is fixed by what the scheme is allowed to operate (PTM044210).

What is the difference for a basic rate taxpayer?

None in practice. Both methods give 20% relief on contributions taxed at 20%. Under net pay the relief appears as lower tax on the payslip. Under relief at source it appears as a top up from the scheme. HMRC’s manual at PTM044100 says that for most people the two methods produce an identical level of relief.

Why do low earners get different results?

The two methods diverge for anyone whose taxable income is below the personal allowance (£12,570 in 2026 to 2027).

  • Relief at source: the scheme still claims 20% even though the member pays no tax. GOV.UK confirms a provider can claim relief at 20% on contributions up to 80% of earnings, or up to £2,880 a year if the person has no earnings at all. That £2,880 grosses up to the £3,600 “basic amount”. Relief at source is also the only method that can relieve contributions above a person’s earnings up to that £3,600 limit.
  • Net pay: relief is given at the member’s marginal rate, which for a non taxpayer is 0%. Their take home pay falls by the full contribution.

Section 193A of the Finance Act 2004 now closes most of that gap. From the 2024 to 2025 tax year HMRC has a duty, so far as reasonably practicable, to pay a top up to people who contributed under net pay but had no income tax liability for the year. The amount is the relief not already received at the basic rate for the person’s part of the UK. HMRC identifies eligible people after the end of the tax year and contacts them, so no application is needed, but the person must confirm bank details through a digital service. Regulations made in 2026 (SI 2026/671, in force from 14 July 2026) changed this: the top up is no longer treated as taxable earnings, the duty now also reaches some people above the personal allowance who receive less relief than they would under relief at source, and HMRC identifies who is eligible from information it already holds.

What about higher and additional rate taxpayers?

Net pay gives full relief at 40% or 45% automatically. Relief at source does not: the scheme only ever claims the relevant rate, so a higher rate taxpayer must claim the extra themselves through Self Assessment or by contacting HMRC. Section 192(4) does this by increasing the basic rate limit and higher rate limit by the gross contribution, which moves an equal slice of income out of the higher bands. The detail is in our guide to claiming higher rate relief on pension contributions.

Scottish taxpayers in a relief at source scheme receive 20% even if they only pay the 19% starter rate, and HMRC does not recover the difference. Those paying the 21% intermediate rate or above must claim the extra. See Scottish income tax for the bands.

How does each method affect adjusted net income?

Adjusted net income drives the High Income Child Benefit Charge above £60,000 and the personal allowance taper above £100,000. Under net pay, the contribution has already come off taxable pay, so it reduces income automatically. Under relief at source, HMRC’s guidance on adjusted net income says to deduct the grossed up contribution: £1.25 for every £1 paid. That deduction only happens if HMRC knows about the contribution, usually through the tax return.

What does this look like in numbers?

Illustration only. Each person makes a gross contribution of £1,000 in 2026 to 2027 and lives in England.

Person Net pay arrangement Relief at source
Basic rate taxpayer £1,000 deducted before tax; take home pay falls by £800 Pays £800; scheme adds £200
Higher rate taxpayer, all £1,000 within the 40% band Take home pay falls by £600 Pays £800; scheme adds £200; claims £200 more from HMRC, net cost £600 only if the claim is made
Earns £10,000, no tax payable Take home pay falls by £1,000; HMRC later pays a top up of £200 under section 193A, which is taxable Pays £800; scheme adds £200

What goes wrong in practice?

  • Higher rate relief never claimed. People moving from a net pay workplace scheme to a personal pension often assume relief is still automatic.
  • Double relief. Relief given under net pay cannot also be given any other way (PTM044230), so net pay contributions must not be entered as relief at source payments on a return.
  • Contributions bigger than pay. If net pay contributions exceed the pay from that employer, for example where a bonus is diverted into the scheme in the final month, full relief cannot be given through payroll. HMRC’s example at PTM044240 shows the member claiming the balance, normally through Self Assessment.
  • Third party and former employee contributions. These cannot go through net pay and need a claim instead.
  • Exceeding the earnings limit. Under either method, relief is capped at the higher of £3,600 or relevant UK earnings, and HMRC can ask for relief above that to be repaid.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.