Government to tackle pension anomaly hitting 1.2m low earners
11 October 2018
The government has confirmed that it is looking at ways to address differences in tax relief, following industry and campaigners calls to help the estimated 1.2m low earners who are in schemes that have no mechanism to pay them their government contribution.
The Financial Times has reported that the government on Tuesday (9 October) confirmed it was looking at ways to “tackle any differences” in how pensions tax relief was provided, as industry and campaigners said the anomaly was a “huge injustice” and a “scandal”.
Reportedly the government is “looking at the opportunities provided by the move to a modern digital tax system to tackle any differences of treatment in provision of tax relief for pensions”.
A letter sent to the Treasury last week (4 October) detailed the issue:
“…There are two ways pension savers can receive tax relief – through either ‘net pay’ or ‘relief at source’ (RAS) arrangements.
Under net pay arrangements, the pension contribution is deducted before the tax is calculated. In RAS arrangements, the pension contribution is deducted after tax is calculated and HMRC later send the tax relief, at the basic rate (20%), to the pension scheme.
The vast majority of occupational pension schemes operate on a net pay basis while traditionally contract-based schemes have operated on a RAS basis.
Members of RAS pension schemes who do not pay income tax, typically those earning less than £11,850 each year, are nonetheless, entitled to basic rate tax relief on pension contributions up to £2,880 a year. However, this tax relief is not available for non-taxpayers in net pay schemes.
This means that the lowest earners in net pay schemes are having to pay 25% more for their pensions (by missing out on 20p for every £1 contributed, they need to pay 25% more to achieve parity)…”
The letter urges government to address the situation urgently for these low-paid workers who can least afford the added cost.
“Figures from HMRC indicate that in 2015/16, 1.22 million people could have been affected by this issue – that includes those automatically enrolled as well as workers already in occupational schemes.”
The CIPP, along with several key stakeholders in the pensions industry, were signatories to the original letter. We welcome this step forward from government to address the anomaly and hope that genuine progress towards this aim is achieved shortly. We have the Budget announcement on Monday 29 October which would be the ideal platform for the Chancellor to make a positive announcement for reform to support those on low pay who are affected by this situation.