Kicking the pension tax-can down the road

01 December 2019

This article was featured in the December 2019 - January 2020 issue of the magazine. 

Henry Tapper, chief executive officer of AgeWage, rightly challenges the tax treatment of low earners

It’s been a season of ‘nearlies’. We nearly left the European Union; nearly had a budget; and we nearly had a pensions bill. But none of this happened for reasons we need to go into.

Meanwhile the pensions system is looking nearly broken – and if we aren’t careful, pension taxation could do some serious damage to the nation’s health as senior doctors find they can’t afford to work their traditional hours for risk of penal pension taxation. Fortunately, their issues get national publicity because the impact is immediate: cancelled operations and longer waiting lists.

Unfortunately, the estimated 1,700,000 pension savers who don’t pay tax and are in net-pay pension schemes are nearly getting the promised incentives. But these savers, who are least well-represented in society, are ending up paying a quarter too much for their pensions.

In October, the Office of Tax Simplification (OTS) issued a report that called on HM Revenue & Customs (HMRC) to implement a P800-type solution to sort what is known in government circles as the ‘net pay anomaly’. What that means is a change in coding for pension savers earning below the income tax threshold – either through opting in or through automatic enrolment (AE). This would effectively credit low earners with up to £63 as a year-end savings bonus.

...the poor overpaying for their pensions creates zero impact for politicians or civil servants


The savings bonus is already being paid to the other group of pension savers paying no tax. This group – who by sheer luck are in relief-at-source pension schemes like NEST (National Employment Savings Trust) and insurance company group personal pensions – are already getting this bonus ‘at source’.

The political importance of the small number of doctors rather outweighs that of the 1.7million low earners, because the poor overpaying for their pensions creates zero impact for politicians or civil servants. Ironically, the beneficiaries of net pay pension schemes are the higher rate taxpayers who get tax relief at their highest marginal rate through their pay packets. Senior civil servants and politicians are exclusively higher rate taxpayers.

The OTS’s estimate, based on HMRC’s own numbers, for putting the net pay anomaly right is a paltry £10,000,000. The cost to the Treasury of paying savers their promised incentive will be less than £60,000,000 per annum. This money – in government terms – is nugatory, but it delivers a meaningful payment to low-paid people and keeps a promise made by government at the outset of AE that all savers would be eligible for a savings incentive (whether taxpayers or not).

As recently as in its tax consultation in 2015, the Treasury was writing to taxpayers as follows: “Average contribution rates will rise as the minimum contribution levels under automatic enrolment increase to 8% in 2018 (of which the individual will pay 4%, the employer will pay 3%, and the government will add tax relief of 1%)”.

The ‘4+3+1’ formulation has become ‘5+3’ for 1.7million savers because the income tax threshold has increased to £12,500 and the AE earnings threshold has stuck at £10,000. As all payroll people know, people can be bounced into AE on the back of a couple of high pay period earnings and end up with P60 certificate earnings well-below £10,000.

What is more, this problem is only going to get worse. If the government delivers on the promised changes to AE in 2020, then we will see the contribution earnings threshold fall further. We may in time see an increase in headline contribution rates.

And there is a very real gender problem here. Of those impacted by this, 70% are women. The net pay anomaly is widening the pensions gender pay gap and particularly discrimination against low-paid women.

The government should be only too aware of the long-term impact of disguising policy through weak disclosure. Whatever the rights and wrongs of the WASPI (Women Against State Pension Inequality) argument, what is undeniable is that most women didn’t realise their state pension age was being put back.

Is the current government policy of not speaking about this issue going to result in the same problem? I suggest it will. At some point the low-paid, or the low-paid’s champions, will see the money that is being overpaid as sufficiently meaningful for it to become a political issue. At this point we are likely to see questions being asked about why no-one was talking about this problem ‘years ago’.

If it takes five years for this to happen, then ‘years ago’ is now. Which begs the question, who will be held responsible for keeping things quiet? I would like to think that the payroll industry will not be fingered amongst those who decided that they could kick this problem down the road.