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Understanding Pension Types

Learn about the different pension contribution methods that can be configured in Cezanne Payroll and how each method affects tax relief and National Insurance calculations.

Pension contribution methods determine how employee pension deductions are processed through payroll and how tax relief is applied.

The method used affects:

    • Whether contributions are deducted before or after tax.
    • How tax relief is provided.
    • Whether National Insurance savings are available.

The system supports three common pension contribution methods:

Pension Type  Pension Deducted From  Tax Relief  NI Saving 
Relief at Source  Net pay (after tax)  Basic rate tax relief claimed by pension provider  No 
Net Pay Arrangement  Gross pay (before tax)  Tax relief given through payroll  No 
Salary Sacrifice  Salary reduced before payroll calculations  Tax relief achieved automatically through reduced salary  Yes 

How They Work

Relief at Source (RAS)

Pension contributions are deducted after tax has been calculated.

The employee pays 80% of the pension contribution and the pension provider claims the remaining 20% basic rate tax relief from HMRC. The full contribution is then paid into the pension scheme.

Net Pay Arrangement

Pension contributions are deducted before tax is calculated.

The employee receives tax relief immediately through payroll because tax is calculated on a lower taxable salary. The full pension contribution is deducted through payroll and paid into the pension scheme.

RAS

When pension contributions use RAS or Net Pay, the employees contribution will show as a deduction, as seen in the image above.

Salary Sacrifice

Salary Sacrifice works differently from both Relief at Source and Net Pay Arrangement.

Instead of making an employee pension contribution, the employee agrees to reduce their contractual salary. In return, the employer makes an equivalent pension contribution on their behalf.

Because the employee's salary is reduced before payroll calculations take place:

      • Tax is calculated on a lower salary.
      • National Insurance is calculated on a lower salary.
      • The employee saves both tax and National Insurance.
      • The employer also saves National Insurance and may choose to add some or all of that saving to the pension contribution.

ss 2

Where salary sacrifice is used, the pension shows in the payments section as seen in the image above.

Example 

The following example shows how a £100 pension contribution is treated for an employee earning £2,000 per month.

Relief at Source Example
  1. Salary = £2,000
  2. Employee pays £80
  3. Pension provider claims £20 from HMRC
  4. £100 is paid into the pension
Net Pay Arrangement Example
  1. Salary = £2,000
  2. £100 pension contribution is deducted before tax
  3. Tax is calculated on £1,900
  4. £100 is paid into the pension
Salary Sacrifice Example
  1. Contractual salary is reduced from £2,000 to £1,900
  2. Employer pays £100 into the pension
  3. Tax and National Insurance are calculated on £1,900
  4. The employee saves tax and National Insurance
  5. The employer also saves National Insurance and may choose to pass some or all of that saving back into the pension

 

Take Note 📝

A simple way to remember the differences is: 

    • Relief at Source: Tax relief comes from the pension provider.
    • Net Pay Arrangement: Tax relief is provided through payroll.
    • Salary Sacrifice: Tax relief and National Insurance savings are achieved because the employee's salary is reduced before payroll calculations are performed.