UK workplace pensions give tax relief one of two ways: a net pay arrangement takes your contribution from gross pay before tax, while relief at source takes it after tax and HMRC adds 20% back. Both rest on section 188 of the Finance Act 2004, but they hit your take-home pay differently.
How does a net pay arrangement work?
Your contribution comes out of gross pay before income tax is calculated, so your taxable pay falls and you get full relief at your marginal rate straight away. A basic-rate payer contributing £100 sees taxable pay drop by £100, saving £20 in tax with nothing to reclaim. This is set out in section 193 of the Finance Act 2004. Most occupational schemes use it; the deduction sits before the tax line on your payslip.
How does relief at source work?
Your contribution comes out of net pay, after tax. The pension provider then claims 20% back from HMRC and adds it to your pot, under section 192 of the Finance Act 2004, so an £80 contribution becomes £100 in the pension. Higher and additional-rate taxpayers must claim the extra relief through Self Assessment; it is not automatic. Personal pensions and many newer workplace schemes use this method.
Net pay vs relief at source: what is the difference?
| Feature | Net pay arrangement | Relief at source |
|---|---|---|
| Contribution taken | Before tax, from gross | After tax, from net |
| Basic-rate relief | Automatic and full | Provider claims 20% into pot |
| Higher-rate relief | Automatic | Claim via Self Assessment |
| Earner below £12,570 | No relief (historically) | Still gets 20% top-up |
Which method leaves a low earner worse off?
Someone earning below the £12,570 Personal Allowance pays no income tax, so a net pay arrangement gives them nothing to relieve, while a relief-at-source saver still collects the 20% top-up. To close that gap, HMRC pays a top-up to low earners in net pay schemes from the 2024/25 tax year onward. Same headline contribution, different outcome, which is why two colleagues on equal pay can build different pots. Our gross vs net pay guide shows where the deduction lands.
Primary sources
- Finance Act 2004, section 188 — legislation.gov.uk — Relief for member pension contributions
- Finance Act 2004, section 192 — legislation.gov.uk — Relief at source: provider reclaims basic-rate relief
- Finance Act 2004, section 193 — legislation.gov.uk — Net pay arrangement: relief given before tax
- Tax on your private pension contributions — gov.uk — The 20% top-up and higher-rate Self Assessment claims
Editorial process: how we source and review UK tax content.