Net pay vs relief at source

Question 1

Tax relief on pension contributions may be given in two ways: “net pay” or “relief at source”:

Answer 1

Net pay scheme
Contributions are deducted from the employee’s gross salary (i.e. before tax has been deducted). The employee then pays tax only on salary “net” of the contributions. This means that the employee automatically receives tax relief at his or her highest rate of income tax.

Relief at source scheme
Contributions are deducted from the employee’s net salary (i.e. after tax has been deducted). However, the employer deducts only 80% of the total contribution from the employee’s salary; the scheme then adds an amount equal to basic rate tax relief, which it then reclaims from HMRC.
*The key point to note is that the scheme adds this top-up to the employee’s contribution whether or not the employee is earning enough to pay tax in the first place.