- Delighted to see Chancellor’s Budget plan to fix flawed pension tax relief rules for lowest earners which meant around 2 million workers were losing out on tax relief.
- More than a million low-earning women are currently paying 25% extra for their pension due to a tax administration anomaly in Net Pay schemes.
- Chancellor proposes to change HMRC systems to ensure they will get their tax relief and higher take home pay – but not till 2025.
I welcome the Chancellor’s announcement to address the Net Pay pension problem, which has reduced take-home pay for the lowest earners in the country. These workers lose out all the time, if their employer has chosen the ‘wrong’ type of pension scheme for them. They have no say in this choice and are usually oblivious to what has been happening. Therefore, I am delighted that the Treasury will act to remedy the situation.
The government provides tax relief on pension contributions to help encourage people to save. However, the lowest earners in auto-enrolment (those earning under £12,570 a year) are currently being denied this money. At least 1.7milion low earners (mostly women) are missing out on tax relief and can do nothing about it.
There was a Call for Evidence which closed last year and a Conservative Manifesto Commitment in 2019 to find a resolution, so today’s announcement shows that the Government will act. Of course, it is disappointing that nothing will change before 2025, and that until then these low earners will still pay 25% more for their pension than they should do, but at least an end is in sight to this injustice.
The Net Pay Action Group has submitted proposals for resolving this problem, which involve changes to HMRC systems that will give the tax relief to each worker who has not received it. Having first highlighted this problem over five years ago, I am very pleased to see it being addressed now and stand ready to help if needed on the implementation.
Here is some brief background:
Employers contribute to their workers’ pension scheme and take contributions from their employees’ salary. Staff should also receive a Government incentive, of at least 25% of the amount each worker pays in. But hundreds of thousads of low-earners never get the Government money.
The Treasury rules on administration of tax relief mean that these workers cannot get the Government contribution to their pensions and are forced to pay an extra 25% for their pensions, than they would have to if their employer chose a different pension scheme for them.
The Net Pay Action Group proposal is a system that would allow HMRC to identify which workers, who earn below the tax threshold, have contributed to a net pay scheme and it could then provide their savings incentive through an existing payment mechanism. This will mean the low earners currently missing out on the taxpayer-funded contribution to their pensions, will no longer end up paying the extra 25% themselves, but will receive what they are entitled to and would have been paid in other types of pension scheme.
If they are enrolled into a ‘Net Pay’ pension scheme, they will therefore have lower take-home pay than in an alternative type of pension. Most do not realise they are paying so much extra, they usually believe they are receiving the promised tax relief to add to their own contribution. But, even if they did find out that they are losing out, there is nothing they can do about it. They cannot reclaim the tax relief later and they cannot move to another scheme, since their employer must choose it for them. Very often, the employers do not realise this either.