Campaigners press government for action on pension tax relief
05 October 2018
The Low Incomes Tax Reform Group (LITRG) is calling on the Government to use the forthcoming Budget and Finance Bill to act on an inconsistency in tax rules which means that more than a million people on low incomes could be losing out on tax relief on their pension contributions.
LITRG makes the call in a Budget representation and also as one of the signatories of a letter sent yesterday (Thursday) to Chancellor Philip Hammond. The other signatories include NOW: pensions and two former pensions ministers – Steve Webb and Ros Altmann.
Members of relief at source pension schemes (RAS) who do not pay income tax, typically those earning less than £11,850 each year, are 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 arrangement schemes (NPA). This means that somebody in NPA, earning £11,850, paying the minimum contributions required under auto-enrolment, is missing out on £34.91 in the current tax year as compared to someone in a RAS scheme.
LITRG Chair Anne Fairpo said:
“Low earners are in a pension lottery through no choice of their own. Those whose employers use traditional RAS schemes receive basic rate tax relief on their contributions. Those – a majority – whose employers use the more recently created NPA schemes do not. This is unfair.
The upcoming increase in pension contribution rates from three per cent to five per cent makes auto-enrolment a much bigger consideration for the lowest paid. But many people on low incomes will not be able to obtain the government contribution promised to them to help make up the five per cent and this may act as a disincentive as it makes auto-enrolment effectively 20 per cent more expensive for them."
In its Budget submission, LITRG suggests a solution that would see HMRC using PAYE Real Time Information (RTI) data to identify those making pension contributions under net pay arrangements. They could then provide tax relief (where appropriate) through an annual reconciliation process – whether that is through self-assessment or – as is more likely – the informal P800 process (the annual reconciliation HMRC perform to check whether those outside self-assessment have paid the correct amount of tax).
Anne Fairpo also said:
“We recognise there are cost implications to putting NPA contributors on an equal footing with those using RAS but our understanding is that this is the basis on which automatic enrolment was originally costed. Parity of treatment is not only fairer, it is what was originally intended.
We urge the Chancellor to take the opportunity to put things right for low paid pension savers as soon as possible and ideally, before the five per cent contribution increase hits on April 19. Otherwise, there is a real risk that the benefits of auto-enrolment will be undermined.”
The letter to the Chancellor can be read in full in LITRG’s press release.
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