What is relief at source for pension contributions?

Question

Accepted Answer

Here is a comprehensive answer on **relief at source (RAS) for pension contributions**.

---

## What the law says

**Relief at source is the default method** of giving tax relief on pension contributions. Under **Finance Act 2004 (FA 2004), s.191(1)–(2)**, relief to which an individual is entitled under s.188 (relief for contributions) is to be given in accordance with **s.192 (relief at source)** unless the legislation provides for another method (net pay arrangements under s.193, or relief on claim under s.194).

**How it works mechanically — FA 2004, s.192(1):** Where an individual is entitled to relief at source, the individual (or other person paying the contribution) is entitled, on making the payment, to **deduct and retain out of it a sum equal to income tax on the contribution at the relevant rate**.

**The "relevant rate"** is ordinarily the basic rate of income tax, but may be the Scottish basic rate or Welsh basic rate if HMRC notifies the scheme administrator accordingly.

**The basic amount:** RAS is regarded as the standard method where the member has relevant UK earnings chargeable to tax of less than the **basic amount of £3,600**.

**Adjusted total income:** When RAS relief is given, the **gross amount** of the contribution (i.e. before deduction of tax under s.192(1)) is deducted in calculating the taxpayer's adjusted total income.

---

## HMRC guidance / practice

**Definition (PTM Glossary):** Under RAS, member contributions are treated as amounts paid after deduction of the relevant rate of tax. The **scheme administrator recovers the tax relief at the relevant rate from HMRC on the member's behalf and adds it to the member's pension fund**.

**Practical mechanics:** The individual pays a **net contribution** (i.e. after deducting the relevant rate of tax), and the scheme administrator then reclaims the equivalent payment from HMRC and has it credited to the member's registered pension scheme.

> **Example (basic rate taxpayer):** Margot wishes to pay £100/month. She pays only £80/month (net of 20% basic rate tax). The scheme administrator reclaims the £20 from HMRC.

**Higher rate / additional rate relief:** A member entitled to higher rate tax relief must **claim the additional relief through their Self Assessment return** — RAS only automatically provides basic rate relief.

**Who can use RAS:** Any member can make relievable pension contributions using RAS, **except** where:
- The member is an employee and the scheme has chosen to operate the **net pay arrangement** for all its employee members;
- The member is in a public service pension scheme or marine pilots' benefit fund and the scheme does not operate net pay and does not choose to operate RAS; or
- The provider of a retirement annuity contract does not wish to operate RAS.

**Member cannot choose:** A member **cannot choose** which method of tax relief applies — this is determined by the method the pension scheme is allowed to operate.

**RAS and net pay cannot both apply:** Where relief is given through RAS, relief may **not** also be given by using the net pay arrangement.

**Administrator obligations:** Before a member is entitled to RAS, they must provide the scheme administrator with basic personal information and declarations (per the Registered Pension Schemes (Relief at Source) Regulations 2005 — SI 2005/3448). The scheme administrator must also provide HMRC with certain information when reclaiming tax and must send HMRC an **annual information return**.

---