NOW: Pensions to top up non taxpayers’ pension pots to offset net pay scheme
14 September 2017
In a press release workplace pension provider NOW: Pensions confirmed that for the 2016/2017 tax year it will again make up the income tax relief shortfall for members of its scheme that aren’t taxpayers (typically those earning less than £11,000) and are currently missing out on the tax relief that they would receive in a relief at source scheme.
The vast majority of occupational and trust based schemes operate on a net pay basis but NOW: Pensions is the only net pay scheme to offer a top up to its membership.
The net pay anomaly
Members of pension schemes who don’t pay income tax, are nonetheless permitted to basic rate tax relief (20%) on pension contributions up to £2,880 a year. In practice this means that HMRC will top up a net contribution of £2,880 to a gross £3,600.
However, this tax relief is only available where the pension scheme operates on a relief at source basis. It is not available for schemes that operate a net pay arrangement.
Until April 2015, both the nil rate tax band and the auto enrolment earnings threshold were £10,000 pa. That meant that employees eligible for auto enrolment were also income taxpayers, and therefore received tax relief regardless of which method of contribution their pension administrator adopted.
From April 2015, the auto enrolment earnings threshold remained at £10,000, but the nil rate tax band was increased to £10,600. It rose to £11,000 for the 2016/2017 tax year. This separation created a tax anomaly in that members with salaries between the two figures are disadvantaged under net pay arrangements.
Differences between net pay and relief at source
With net pay, contributions are deducted from the member’s gross salary before tax is deducted. Therefore, whether the member pays 20%, 40% or 45% tax, they enjoy full tax relief up front and immediate investment of the gross contribution. However, in a net pay scheme, non-taxpayers will not receive the tax relief they are entitled to.
In relief at source arrangement, contributions are taken from the member’s net salary after tax. The amount deducted is 80% of the gross contribution.
Under relief at source, non-taxpayers still receive tax relief at 20% and this relief is claimed from HMRC on behalf of the member, and invested directly into their pension fund.
Higher rate tax payers have to claim back the difference up to 40% directly from HMRC, normally through an adjustment to their tax code. Additional rate taxpayers are only permitted to make the additional claim through their tax return form.
How much are savers missing out on?
For somebody earning £11,000, paying auto enrolment minimum contributions, the maximum they are missing out on is £10.35 per year. But, as the nil rate tax band increases this will grow so that by 2020/21 when the nil rate tax band rises to £12,500 savers could be missing out on as much as £5.00 per month.