Cast your mind back, if you can, to 2012 and the introduction of auto-enrolment. This was the first time that all employers were to have a mandatory role in the provision of workplace pensions.
Whilst many of the initial decisions about choice of provider may well have been taken by HR teams, or in smaller businesses by the owners themselves, the heavy lifting was left to those operating the payroll, whether that was in-house or outsourced.
One of the additional complexities facing employers was the method by which pension tax relief was offered to employees. Many small employers had never had any involvement in pensions, let alone the very important addition of tax relief as part of the savings’ model. We shouldn’t forget that pre-auto enrolment the only obligation was to set up a stakeholder pension scheme and expect employees to opt in, which of course most didn’t, at the majority of SMEs.
There was much confusion about the two methods of tax relief, made considerably worse by the inappropriate titles attached to them:
Relief at Source (RAS) – where the source of the tax relief is HMRC who provide additional savings at basic rate tax after a claim made by the pension provider, with the expectation that higher rate taxpayers would understand that to get any additional top up they were entitled to they had to take action through the self-assessment system
Net Pay Arrangement (NPA) – the source of the tax relief is the employer who, despite the suggestion in the title, is required to reduce taxable gross pay to offer the relief at the employee’s highest marginal rate of 20%, 40% or 45%, with no action required by the employee or the pension provider.
