The Low Incomes Tax Reform Group (LITRG) has published a report highlighting payroll errors in workplace pension tax relief, warning that confusion between Net Pay Arrangements (NPAs) and Relief At Source (RAS) schemes may be leading to incorrect tax relief, employer PAYE non-compliance, inaccurate HMRC data and risks to the government's forthcoming low-earner pension top-up scheme.
The report examines errors that arise when employers apply the wrong pension tax relief mechanism through payroll, particularly where a Relief At Source (RAS) pension scheme is incorrectly treated as operating under a Net Pay Arrangement (NPA).
- Under an NPA, pension contributions are deducted before tax is calculated. Under RAS, however, contributions are deducted after tax, and the pension provider later claims basic rate tax relief from HMRC.
The Low Incomes Tax Reform Group (LITRG) argues that confusing terminology used in payroll software and HMRC guidance contributes to errors.
- In particular, payroll systems often use the phrase 'contributions paid but not under net pay arrangements' instead of the more familiar term 'relief at source'.
Where a RAS scheme is mistakenly treated as an NPA scheme, employees can receive tax relief through payroll and again through the pension scheme's reclaim from HMRC, resulting in unintended double tax relief.
- Such errors can leave employers with PAYE liabilities, interest and potential penalties, while also creating inaccurate Real-Time Information (RTI) records held by HMRC.
- LITRG says the problem may be particularly relevant for small and micro employers that use HMRC's Basic PAYE Tools software and have limited access to professional payroll support.
The report notes that pension tax relief errors can remain undetected for long periods because there are few checks to identify inconsistencies between payroll submissions and pension scheme tax relief claims.
- LITRG expresses concern that inaccurate RTI data could affect the government's planned top-up payments for around 1.2 million low earners in NPAs, as the scheme will rely on payroll data being correct to identify eligible individuals.
The report recommends that HMRC:
- Replace confusing RTI terminology with clearer references to 'relief at source'.
- Improve guidance on correcting pension tax relief mistakes.
- Simplify the process for employers to disclose and correct historic PAYE errors.
- Ensure corrections update or flag the underlying RTI pension data.
- Assess the scale of pension tax relief errors using HMRC's own data.
- Review and cleanse pension-related data before the low-earner top-up scheme becomes operational.
LITRG concludes that addressing these issues would improve payroll compliance, support accurate pension outcomes and help maintain confidence in auto-enrolment and future pension support initiatives.
Useful guide on this topic
Pensions: Tax rules and planning
What tax rules apply to pensions? What tax relief is available? What tax charges can arise? What planning opportunities are there?
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