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How should I calculate tax relief with my earnings basis?

It’s important to understand how to calculate tax relief. This will help you to send the right amount of worker contributions to us and make sure they get tax relief on their contributions from the government. It’ll also make sure that we don’t claim tax relief on a worker’s contribution if it’s not due.

When you pay contributions to us on behalf of a worker they’re made up of employer contributions and worker contributions. Employer contributions are set at a level you’ve agreed with us. Worker contributions depend on whether the worker is eligible for tax relief or not.

The tax relief method we use is relief at source (RAS), where we claim tax relief back from HM Revenue Customs (HMRC) on behalf of an eligible worker after contributions are paid to us. NEST calculates tax relief after tax and National Insurance.

If a worker is eligible for tax relief, the tax rate will be determined by where the worker lives. For example Scotland or UK excluding Scotland. This will be based on the information provided to us by HMRC. The basic rate of tax relief is 20 per cent. This means, for every £1 of a worker’s contribution we’ll claim 20p from the government.

If the worker’s contribution is 3 per cent and they’re eligible for tax relief their actual contribution will be made up of:

  • 2.4 per cent from their pay – this is what you send to us
  • 0.6 per cent tax relief – this is what we claim from the government

So if a worker is eligible for tax relief the worker contribution level you set for them (3 per cent in this example) is higher than the amount you actually send (which is 2.4 per cent in this example).

Some pension schemes use a net-pay approach for tax relief, where the employer deducts contributions from a worker’s salary before calculating income tax on the reduced amount. NEST doesn’t use this approach.

If a worker isn’t eligible for tax relief, the only difference is that the contribution you take from their net earnings will be 100 per cent of the contribution level you’ve set in their group. So, if you set 3 per cent as the contribution level you’d send 3 per cent worker contribution.

To understand whether or not your workers are eligible for tax relief, please see How will I know which workers are eligible for tax relief?

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