What Is the Difference Between Net Pay and Relief at Source Schemes

This guide explains the difference between net pay and relief at source pension schemes including how contributions are taxed and who benefits most from each system.

When you pay into a pension the way your tax relief is applied depends on the type of pension scheme your employer uses. In the UK there are two main methods used by workplace pensions: the net pay arrangement and the relief at source system. Both give pension tax relief but they work very differently and the method used can affect your take home pay, the amount of tax relief you receive, and whether you need to claim extra relief through Self Assessment.

In my opinion understanding the difference between net pay and relief at source schemes is essential because many people do not realise which system they are in. As a result they either miss out on tax relief they are entitled to or assume they need to claim relief when in fact they already received it automatically. This guide explains how both systems work, who benefits most from each approach, how to tell which one you use, and how the rules apply to higher earners and low earners.

The Two Pension Tax Relief Systems Explained

Workplace pension schemes apply pension tax relief under one of two systems:

  1. Net pay arrangement (NPA)

  2. Relief at source (RAS)

Both systems give you some form of tax relief but they do not work the same way and they do not treat all taxpayers equally.

What Is a Net Pay Arrangement

In a net pay arrangement pension contributions are taken from your pay before income tax is calculated. This means:

  • You automatically receive tax relief at your highest tax rate

  • Your taxable income is reduced

  • You do not need to claim higher rate relief through Self Assessment

  • You do not pay tax on the contribution

Example

If you earn £40,000 and contribute £2,000 under a net pay scheme:

  • Your taxable income becomes £38,000

  • You pay tax only on £38,000

  • You receive full tax relief automatically

Benefits

  • Best for higher rate or additional rate taxpayers

  • No need to reclaim extra tax relief

  • Reduces adjusted net income which can help with Child Benefit and personal allowance taper

  • Very tax efficient in practice

Disadvantages

  • Low earners earning below the personal allowance do not receive tax relief because they are not paying tax to begin with

  • This can make low earners worse off compared to relief at source

In my opinion net pay schemes are excellent for higher earners but less favourable for low earners.

What Is a Relief at Source Scheme

In a relief at source scheme pension contributions are taken after tax is calculated. This means the pension provider must claim tax relief from HMRC and add it to your pension pot.

How it works

  • You pay 80 percent of the contribution

  • The pension provider claims 20 percent from HMRC

  • HMRC adds this to your pension automatically

  • Higher and additional rate taxpayers must claim extra relief themselves

Example

You pay £80 into your pension.
The pension provider adds £20.
Your pension pot receives £100.

Benefits

  • Low earners who pay no tax still receive the 20 percent top up

  • Simple for employees with no need to adjust payroll

  • Works well for personal pensions like SIPPs

Disadvantages

  • Higher rate and additional rate taxpayers must reclaim extra tax relief

  • Your taxable income is not reduced directly

  • Can increase adjusted net income unless you claim relief

Relief at source is extremely common among workplace schemes such as NEST, People’s Pension, and many private pensions.

Key Differences Between Net Pay and Relief at Source Schemes

Here is a clear breakdown of how the two systems differ.

1. When the contribution is taken

Net pay: Before tax
Relief at source: After tax

2. Where the basic tax relief comes from

Net pay: Through payroll
Relief at source: HMRC pays the pension provider directly

3. Impact on your taxable income

Net pay: Reduces taxable income
Relief at source: Does not reduce taxable income

4. Impact on adjusted net income

Net pay: Reduces adjusted net income
Relief at source: Reduces adjusted net income only after you claim higher rate relief

5. Higher rate taxpayers

Net pay: Tax relief automatic
Relief at source: Must claim extra 20 percent yourself

6. Low earners

Net pay: Low earners may miss out on tax relief
Relief at source: Low earners receive 20 percent even if they pay no tax

7. Interaction with Child Benefit and personal allowance

Net pay: Immediate reduction in income for these calculations
Relief at source: Reduction happens only after claiming relief through Self Assessment

8. Salary sacrifice

Salary sacrifice is separate from both systems and works differently, although its result is similar to net pay.

Who Benefits Most From Each Scheme

Who benefits most from net pay schemes

  • Higher rate taxpayers

  • Additional rate taxpayers

  • People close to the Child Benefit threshold (£50,000)

  • People close to losing their personal allowance (£100,000 plus)

  • Anyone who prefers tax relief to be automatic

Who benefits most from relief at source schemes

  • Lower earners earning below the personal allowance

  • Employees on part time hours

  • Individuals without Self Assessment who would not reclaim relief otherwise

  • Self employed people using SIPPs

  • Those who want predictable contributions regardless of tax band

In my opinion the best system depends entirely on your income situation.

How Higher Rate Relief Works in Each Scheme

Net pay

Higher rate relief is automatic because contributions reduce taxable income before tax is calculated.

Relief at source

You must claim the extra 20 percent through:

  • Self Assessment
    or

  • A tax code adjustment if you do not file a tax return

Additional rate taxpayers can also claim the extra 25 percent in the same way.

Example

Contribution: £500
Gross contribution: £625
If you are a 40 percent taxpayer:

  • Provider gives £125

  • You claim an extra £125

If you are a 45 percent taxpayer:

  • Provider gives £125

  • You claim an extra £156.25

This is one of the most misunderstood parts of pension relief.

How to Tell Which Scheme You Are In

You can check:

1. Your payslip

If your pension contribution is deducted before tax your scheme is net pay.

If your pension deduction appears after tax your scheme is relief at source.

2. Your pension provider

NEST and People’s Pension are relief at source.
Many trust based schemes use net pay.

3. Your HR or payroll department

They will confirm which system your employer uses.

4. Your pension statement

Relief at source pensions usually show a 20 percent top up. Net pay pensions do not.

5. Your tax code

If higher rate relief has been claimed automatically your tax code may be unchanged. If it needs adjusting you are likely in a relief at source scheme.

Impact on Net Pay and Relief at Source for Key Tax Situations

1. Child Benefit

Net pay schemes reduce adjusted net income immediately which can restore or protect Child Benefit.
Relief at source only helps once you claim relief.

2. Personal allowance taper

Net pay helps reduce adjusted net income quickly.
Relief at source requires a Self Assessment claim.

3. Tapered annual allowance

Both systems count towards gross pension contributions but net pay schemes integrate more naturally with income reductions.

4. National Minimum Wage

Net pay contributions cannot breach minimum wage rules because they reduce taxable income. Salary sacrifice needs separate checks.
Relief at source contributions do not affect minimum wage calculations.

Real Examples

Example 1: Basic rate taxpayer

Claire earns £28,000.
In a net pay scheme she receives no tax relief because she pays no tax at that level.
In a relief at source scheme she receives the 20 percent uplift automatically.
Outcome: Relief at source is better for her.

Example 2: Higher rate taxpayer

Mark earns £70,000.
With net pay he receives full higher rate relief automatically.
With relief at source he must claim the extra 20 percent.
Outcome: Net pay is easier but both systems give the same total benefit if he claims properly.

Example 3: Parent losing Child Benefit

Sarah earns £53,000.
If she pays into a net pay pension her taxable income falls immediately below £50,000.
If she is in relief at source she must wait for Self Assessment to reduce adjusted net income.
Outcome: Net pay creates faster results.

Example 4: Company director using a SIPP

James has a low salary and high dividends.
He uses a relief at source SIPP and claims higher rate relief via Self Assessment.
Outcome: Relief at source works well because net pay is not available through his company.

Salary Sacrifice: A Third Option

Salary sacrifice works differently but deserves mention because it is often the best solution for higher earners.

How it works

  • Your salary is contractually reduced

  • Employer pays the sacrificed amount into your pension

  • You do not pay tax or NI on the sacrifice

  • Employer saves NI and sometimes shares the saving with you

In many ways salary sacrifice acts like a supercharged net pay scheme.

Final Thoughts

The difference between net pay and relief at source schemes is all about timing and method. Net pay reduces taxable income before tax so relief is automatic and immediate. Relief at source applies after tax so the provider claims 20 percent and you claim the rest if you are a higher rate taxpayer. Both systems deliver tax relief but they affect different people in different ways.

In my opinion higher earners benefit most from net pay or salary sacrifice because relief is automatic and adjusted net income is reduced straight away. Lower earners benefit more from relief at source because they receive a government top up even if they pay no tax.

Understanding which pension system you are in helps you claim the correct relief, avoid missing out on savings, and plan your pension contributions more effectively each year.