What to do when the wrong tax relief method is used transcript
There are two types of tax relief used for employee pension contributions. They are net pay arrangement and relief at source, often referred to as (RAS).
Only one tax relief method can be used per pension scheme, so it is very important the right method is being used.
Group personal pension schemes will always use RAS. Master trusts usually have a single method for all their pension schemes, for instance Nest is always RAS. Smart and Now Pensions are always net pay arrangement, some may give the employer a choice, such as the People's Pension which defaults to RAS, but allows the employer to choose net pay arrangement.
Please check that your clients are using the correct method. If you find any that are not you should speak with your client and their pension provider and establish steps to rectify the situation, such as correcting the error going forward, working out how far back the problem goes, working out who is affected and what the amounts are, and a time scale for correcting the problem. Most importantly, communicate with affected employees.
You may also need to include HMRC in your discussions, especially where net pay arrangement has been used instead of RAS or multiple tax years are involved.
The employer should also notify TPR of an error so we are aware and can offer help if needed.
Please do not delay in checking your client’s payrolls and pension scheme requirements.
When net pay arrangement has been used instead of RAS, the employee will have received too much tax relief and so is very likely to have underpaid tax.
HMRC will look to the employer to fix this and possibly repay any underpayment.
Where RAS has been used instead of net pay arrangement there will be an underpayment of employee pension contributions which the employee will need to pay although we would expect the employer to make up any short form.