Who can get a pension contribution refund?
How are pension refunds processed?
Payrolling pension refunds
Salary sacrifice
Net pay arrangement
Relief at source
This article explains the circumstances where an employee can request a refund of their pension scheme contributions.
Who can get a pension contribution refund?
An employee may be able to get a pension scheme refund if:
They have been automatically enrolled in to a workplace pension scheme and have opted out within a month of their first contributions being taken.
They have less than 30 days of service when they leave employment
How are pension refunds processed?
Pension refunds can be processed in two different ways:
Directly via the payroll if contributions have not yet been invested to the pension scheme administrator.
Directly from the pension scheme administrator. It is an employer's responsibility to provide the scheme administrator information to an employee if a refund needs to be processed directly from the scheme.
Payrolling pension refunds
If your scheme allows pension contribution refunds to be made via the monthly payroll, the treatment of tax and National Insurance will depend on how the pension contributions were initially deducted.
There are three arrangements for deducting pension contributions from an employee:
Salary sacrifice - pension is taken before tax and National Insurance
Net pay arrangement - pension is taken before tax but after National Insurance
Relief at source - pension is taken after tax and National Insurance
For more information on each arrangement, click here.
Each arrangement has different implications for refunding pension contributions.
Salary sacrifice
Salary sacrifice pension contributions can only be refunded via the payroll due to the tax and National Insurance implications.
As salary sacrifice contributions reduce gross pay, a pension refund should increase gross pay so that tax and National Insurance are paid on the pension refund.
For example
Pension refund due: £200.00
Normal taxable pay: £2,000.00
Normal NIable pay: £2,000.00
Taxable pay with pension refund: £2,200.00
NIable pay with pension refund: £2,200.00
Tax and National Insurance calculations will be based on the gross pay including the pension refund to reverse the salary sacrifice treatment received when the contribution was deducted.
Net pay arrangement
Net pay arrangement contributions can only be refunded via the payroll due to the tax implications.
As net pay arrangement contributions reduce taxable pay, a pension refund should increase taxable pay so that tax is paid on the pension refund.
For example
Pension refund due: £200.00
Normal taxable pay: £2,000.00
Normal NIable pay: £2,000.00
Taxable pay with pension refund: £2,200.00
NIable pay with pension refund: £2,000.00
Tax calculations will be based on the gross pay including the pension refund to reverse the tax treatment received when the contribution was deducted via the net pay arrangement.
Relief at source
Relief at source contributions can be refunded via the payroll and via the pension scheme directly as there has been no tax or National Insurance relief for the employee, so the amount deducted from the employee was a net amount.
The amount of the pension refund should be added to the employee's net pay.