Employees can save for their retirement through a workplace pension arranged by their employer. Every payday, a percentage of your pay is automatically deposited into the pension scheme. Most employers also contribute to your pension scheme. The government may also offer you tax relief.
Some employers are incorrectly processing workplace pension contributions, according to HMRC. Why is this a big problem and how can we solve it?
Relief from taxation
Most employers are required to offer workplace pension plans. Employers collect employees’ contributions from their salaries and pass them along to pension companies. However, HMRC says some employers are getting it wrong and underpaying their PAYE.
The trap
As an employee, you are responsible for any PAYE shortfall. If an employee leaves, it can be tricky to recover it from them. You will be responsible for paying PAYE.
The first pitfall
A net pay arrangement or a relief at source arrangement is available for tax relief on pension contributions. If net pay applies you must deduct the full amount of employee contributions from their gross pay. With relief at source you must deduct a reduced contribution. Some employers are using the relief at source field in their payroll software when the net pay scheme should apply. This results in insufficient PAYE tax being deducted from employee pay.
Pension companies determine which method of tax relief should be used. If you’re not sure which method to use, don’t hesitate to contact your pension provider.
The second pitfall
A salary sacrifice arrangement for pension contributions occurs when employees accept a lower salary in exchange for additional contributions from you. The HMRC reports that some employers still show the contributions as coming from ”employees” instead of ”employers” in their payroll software. In this case, the employee receives double tax relief.
The tip
Ensure that your payroll manager is using the correct method. HMRC must be notified if an error has been made in an earlier tax year, but if the error has been made in the current tax year it can be corrected without notifying them.
Conclusion
Payroll errors caused underpayments of PAYE, and you as an employer are liable for the shortfall. Be sure to check with your pension company if you should use ‘net pay’ or ‘relief at source’ for contributions.
Our Pension Team specialists can provide professional advice to employers who need further advice on this matter. Contact us today.