What is the net pay arrangement for pension contributions?
Answered 17 March 2026
HMRC Guidance / Practice
The net pay arrangement is a method by which employers give employees tax relief on their pension contributions through the payroll. Here is how it works:
How It Operates
Under the net pay arrangement, the employer deducts the pension contribution from the employee's gross pay before tax is calculated, meaning PAYE is applied only to the reduced (net) amount. This gives the employee full tax relief at their marginal rate upfront.
For example, if a contribution is £100, the full £100 is deducted from the member's pay and paid into the pension scheme. Because the contribution is taken before tax is calculated, the member has effectively received full tax relief immediately.
The contribution reduces the member's taxable employment income and their 'net income' for tax purposes.
Who Can Use It
Only the following individuals may have their relievable pension contributions relieved through the net pay arrangement:
- Members of an occupational pension scheme who are employees of a sponsoring employer for that scheme;
- Employee members of a public service pension scheme; or
- Employee members of the marine pilot's benefit fund.
Third-party contributions cannot be paid via the net pay arrangement — tax relief must instead be claimed, generally through Self Assessment.
All-or-Nothing Rule
A scheme member can only use the net pay arrangement if all other employee members of the same employer are also contributing under it. An employer cannot apply net pay to one group and relief at source to another.
No Double Relief
Once relief is given through the net pay arrangement, it cannot also be given under any other provision to avoid a double deduction.
NIC Treatment
Importantly, NICs are not affected by the net pay arrangement. NICs must be assessed on gross earnings before deduction of any pension contributions, regardless of whether a net pay arrangement is in place. There is no equivalent NICs relief.
Where Payroll Deduction Is Not Possible
If a member contributes to a scheme operating the net pay arrangement but it is not possible to make the contribution via payroll, the individual can claim tax relief under section 193(4) Finance Act 2004 ("excess relief") — for Self Assessment filers, this is box 3 under 'Tax reliefs' on the SA100.
Citation sources
Only an individual entitled to tax relief who is: both a member of an occupational pension scheme and an employee of a sponsoring employer for that scheme, or an employee member of a public service pension scheme, or an employee member of the marine pilot’s benefit fund may have their relievable pension contributions relieved through the net pay arrangement. If a third party makes a relievable pension contribution in respect of a member the contribution cannot be paid via the net pay arrangement
When an individual makes a contribution under the net pay arrangement (see PTM044230) the contribution is deducted from the member’s pay before tax is calculated. The payment of the contribution reduces the members’ taxable employment income. Tax relief on member contributions with transitional corresponding relief (see PTM111500) is given by deducting the amount of the contributions from the individual’s taxable employment income. Contributions paid under the net pay arrangement or with trans
Tax relief on employee pension contributions If an employer establishes a pension scheme for their employees, they can register for tax relief with HMRC. If an employer deducts pension contributions from their employees’ pay and pay these to a registered pension scheme they may be able to use what is known as a ‘net pay arrangement’ to give their employees tax relief on their pension contributions. If the employer can use a net pay arrangement, tax relief is due on any contributions employees ma
If the employer is operating the net pay arrangement then pension contributions will be by means of payroll deduction. The member’s employers will deduct the contribution from the ‘gross pay’ in the tax year the contribution is made. The employer is able to operate ‘PAYE’ on the net amount giving full relief at the marginal tax rate. Once relief is given on a contribution through this arrangement, relief will not be given on the contribution under any other provision to avoid a double deduction