Set up a pension contribution refund

If an employee opts out of your pension scheme directly with your pension provider within the 'opt out' window, you may need to refund any existing pension contributions that they, and you, have made. Add a pay item as a deduction, and a second pay item as a benefit before you update the employee's pay template to complete the refund.

  1. Set up a deduction
  2. Set up a benefit
  3. Complete the refund

Set up a deduction

  1. From the Settings menu, select General Settings.
  2. Under Features, click Payroll Settings.
  3. Click the Pay Items tab, and select Deductions.
  4. Under the Add button, select the category that matches your pension arrangement, either Pre-Tax Pension (NPA), Post-Tax Pension (RAS), or Salary Sacrifice.
  5. Enter the refund details:
    • Deduction Name - We recommend that you use an easy to identify title, such as [Pension provider name] refund.
    • Calculation Type - Select Fixed Amount and enter 0.00 in the Standard Amount field.
    • Liability Account - This should match the details of your other pension deduction liability account.
    • (Optional) Calculate on Qualifying Earnings - Select the checkbox to base the employee contributions on their banded earnings.
    • (Optional) Reduce By PAYE Basic Rate - Select the checkbox for this Post-Tax Pension (RAS) option to reduce employee contributions by the PAYE basic rate.
  6. Click Add.

Set up a benefit

  1. From the Settings menu, select General Settings.
  2. Under Features, click Payroll Settings.
  3. Click the Pay Items tab, and select Benefits.
  4. Under the Add button, select Pension.
  5. Enter the refund details:
    • Benefit Name - We recommend that you use an easy to identify title, such as [Pension provider name] refund.
    • Calculation Type - Select Fixed Amount and enter 0.00 in the Standard Amount field.
    • Liability Account - This should match the details of your other pension deduction liability account.
    • Expense Account - This should match the details of your other pension deduction liability account.
    • Show Balance to Employee - Select this checkbox if you want this to show on their payslip.
  6. Click Add.

Complete the refund

  1. In the Payroll menu, select Employees.
  2. Click into the details of the employee you want to refund.
  3. Click the Pension tab.
  4. Enter an opt out reason and date.
  5. Under the employee's Pay Template tab, add pay items for the refund deduction and benefit pay items that you’ve created.
  6. Add a company maximum amount in the Company Max field on the benefit pay item.
  7. When you next process a pay run, go to the employee who needs the refund, and overwrite the 0.00 in both their refund pay items with a negative amount that matches the refund value.

The current RTI submission to HMRC doesn't allow negative YTD pension values. For example, if you think you'll have employees to enrol in March and expect to have refunds to process in April, Xero will send negative pension for the period value, and 0.00 for pension YTD.

If this is your situation, HMRC will expect you to use an Earlier Year Update (EYU) submission to amend the previous tax year pension YTD value. In order to work around this you can choose to make use of the postponement feature to push your assessments into the following tax year.

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