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What Is a Net Pay Arrangement?
A net pay arrangement (sometimes called the gross tax basis) is one of two ways UK pension schemes give you tax relief on your contributions. Under this method, your employer takes your pension contribution out of your gross pay first, then works out Income Tax on what is left.
Because your taxable pay is lower, you pay less tax. That reduction in tax is your relief. Nothing is claimed back later, and you do not need to fill in a form. It happens inside the payroll run. HMRC puts it simply in its Pensions Tax Manual: if the contribution is £100, £100 comes off your pay and £100 goes into the scheme, and because it came off before tax you have effectively had full relief.
The tax relief you receive depends on the Income Tax rate that would otherwise apply to the part of your pay used for the pension contribution. A basic-rate taxpayer can effectively receive 20% relief, while a higher-rate taxpayer can receive 40%. If no Income Tax is due on that part of your income, there may be no immediate tax saving through a net pay arrangement.
Which Schemes Can Use It
Not every scheme is allowed to. Under section 191(3) Finance Act 2004 a net pay arrangement can be used where the scheme is an occupational pension scheme, you are an employee of a sponsoring employer, and every other contributing member who works for that employer is also on the same basis. Section 191(4) and (8) allows it for public service pension schemes, such as the Principal Civil Service Pension Scheme and the Local Government Pension Scheme, and for marine pilots' benefit funds.
Three consequences catch people out:
Your employer cannot mix the two methods. HMRC states it plainly: an employer cannot let one group of employees use net pay and another use relief at source. So if you are in the wrong scheme for your income level, your employer cannot fix it for you alone.
It only works while you are an employee. If a member is no longer employed by the sponsoring employer, net pay cannot be used for them. They claim through Self Assessment instead.
Third party contributions cannot go through it. If someone else pays into your pension for you, relief comes by claim, not through payroll.
Simple Example of a Net Pay Arrangement
Priya earns £30,000 in 2026/27 and pays 5% of her salary into her workplace pension.
Amount | |
|---|---|
Gross salary | £30,000 |
Pension contribution at 5% | £1,500 |
Taxable pay after the contribution | £28,500 |
Income Tax relief received at 20% | £300 |
Cost to Priya | £1,200 |
Amount in her pension | £1,500 |
The £300 tax saving is calculated as: £1,500 × 20% = £300 |
|
Priya is a basic rate taxpayer, so her £1,500 contribution reduces her tax bill by £300. She gets £1,500 in her pension for £1,200 out of her own pocket, and she did nothing to make it happen.
Disclaimer
These figures are illustrative. Your own position depends on your specific earnings, contributions and tax code.
What Is the Low Earners Pension Anomaly?
The system works cleanly for Priya because she pays tax. It stops working when you do not.
The Personal Allowance for 2026/27 is £12,570. Income below that is not taxed. So if you earn £10,000, taking a pension contribution off your pay before tax saves you nothing, because there was no tax on that money to begin with. The contribution still leaves your pay. The relief never arrives.
Relief at source pays no attention to your tax position. The provider claims 20% from HMRC on the gross contribution and adds it to your pot whether you are a taxpayer or not.
Two people, same pay, same contribution, different outcome. That is the anomaly. It falls hardest on part time workers, people on lower salaries, apprentices and anyone with variable hours, and because it depends entirely on which scheme an employer picked, nobody affected had a say in it.
It Is Not All Or Nothing At £12,570
Most explanations treat this as a cliff edge. It is not. Relief under a net pay arrangement only applies to the part of your contribution that sits against income you actually paid tax on.
Take someone earning £13,000 with a £1,000 contribution. Only £430 of their income was taxable, so only £430 of the contribution attracts relief:
At the 20% basic rate:
£430 × 20% = £86 tax relief
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Before any top-up they pay £914(£1000-£86) for a £1,000 pension credit, while a relief at source member in the same position pays £800 with the pension provider claiming £200 in basic-rate tax relief from HMRC and adding it to the pension.
