How Does the Relief at Source Pension Work?

Relief at Source (RAS) is one of the two main ways that pension contributions receive tax relief. It’s often used by providers like NEST, The People’s Pension, and others.

🧾 What Is Relief at Source?

With Relief at Source:

The employee’s pension contributions are deducted from net pay (after tax and NI)
The pension provider then claims basic rate tax relief (20%) from HMRC
HMRC pays this directly to the provider, which adds it to the employee’s pension pot

🔍 RAS vs. Net Pay Arrangement

Method	Taken From	Tax Relief Claimed By	Immediate Full Relief?
Relief at Source	Net pay (after tax)	Pension provider from HMRC	❌ No — basic rate only
Net Pay	Gross pay (before tax)	Given automatically via PAYE	✅ Yes — all tax bands

Once a scheme is set up with a tax relief method, it cannot usually be changed without starting a new pension plan.

✅ How It Works in Practice

Let’s say an employee contributes 5% of their salary to a pension.

If eligible for tax relief:

The employee contributes 4% from their take-home pay
The pension provider claims 1% (20% basic rate tax relief) from HMRC
Total contribution into the pension pot: 5%

If not eligible for tax relief (e.g. due to earnings):

The full 5% is deducted from their net pay with no top-up

💼 Higher and Additional Rate Taxpayers

Employees who pay more than the basic tax rate:

Will still only receive basic rate relief (20%) via the pension provider
Must claim the extra relief themselves via:
- Self Assessment
- Or directly contacting HMRC

Tax Rate	Total Relief	Auto-claimed	Additional Claim Needed
20%	20%	✅ Yes	❌ No
40%	40%	✅ 20%	✅ 20% (via HMRC)
45%	45%	✅ 20%	✅ 25% (via HMRC)

Claims can often be backdated up to three tax years.

👥 What About Non-Taxpayers?

One of the main advantages of Relief at Source is that non-taxpayers still benefit:

Anyone earning below the personal allowance can still receive 20% tax relief
For example:
- They contribute £2,880
- HMRC adds £720
- Total pension contribution: £3,600

This makes Relief at Source especially beneficial for low earners or those on maternity leave or reduced hours.

🧑‍💼 For Employers & Payroll Setup

RAS contributions are based on net pay — tax and NI are calculated first
Payslips show the actual deduction, and the provider handles the top-up
Ensure the correct scheme type (RAS vs Net Pay) is set in your payroll system

📬 Need Help With Setup?

💬 Contact us here if you're unsure which tax relief method your scheme uses, or need help configuring this correctly in your payroll system.