Hi @carol50
As posts above suggest, there are two options for deduction.
The names for which (IMHO) are the wrong way round!
(1) Probably the most common is Relief at Source.
This is most suitable for lower paid employees (those who pay no tax or are in the 20% bracket). The employee deduction is calculated on the Net Pay (after tax & NI) at 80% of the headline deduction rate. In this case, 4%. This is handed to the pension provider who claim a top-up from HMRC (equivalent to 20% of the headline rate). Including this top-up, the employee percentage is 5%.
Since pensions are entitled to tax relief at the marginal rate (highest tax bracket that the employee pays tax), an employee paying tax at 40% would not get full relief & would have to claim the extra back using self-assessment.
(2) Optional is Net Pay Arrangement.
The employee deduction is calculated on Gross Pay (before tax) at 5% so the full tax relief is gained straightaway without the need to claim anything from HMRC. This is not suitable for employees that pay no tax as they get zero tax relief & no top-up from HMRC.
See why the names are confusing?
Relief at Source doesn't actually provide relief at the source (the employer) - the relief comes from HMRC via the pension company while Net Pay Arrangement is based on gross pay, not net pay!
No wonder people think pensions are confusing!
This - https://www.moneyadviceservice.org.uk/en/articles/tax-relief-and-your-workplace-pension - is quite a good description of the two systems.
