Net Pay Action Group has ‘oven-ready’ proposals to end injustice of forcing low-paid workers to pay 25% surcharge on their pensions.
New Government can improve income and pension prospects for more than one million women.
Honouring the Conservative manifesto commitment will ensure lowest earners get the Government contribution to their pensions.
The Net Pay Action group has submitted proposals that will allow the Government to honour its manifesto commitment to address the injustice faced by workers earning below £12,500 who are put into a pension scheme at work which forces them to pay the extra 25% pension contribution that taxpayers would contribute if their employer used a different type of pension scheme.
This little-known injustice means that 1.7million of the lowest earners in the country (more than one million of whom are women) are being denied the extra money they could receive if their pension scheme operated on what is known as a ‘Relief at Source’ basis, rather than being administered as a so-called ‘Net Pay’ scheme. This means that all these workers are paying at least £63 a year more for their pensions and often far more than that. This is money they would be entitled to if their employer had chosen a Relief at Source scheme, but which they have no way of recovering at the moment.
The Conservative Manifesto promised a review – and the Net Pay Action Group has submitted ‘oven-ready’ proposals that the Government could adopt, which would offer a remedy to this injustice.
Currently, the low earners do not know they are being charged an additional 25% for their pension, and even if they did know, they would not be able to do anything to recover these extra charges. Rather than allowing another pension scandal to emerge, I urge the Government to fix the problem as quickly as possible. This issue has the potential to derail confidence in pensions and possibly also to undermine the hugely successful auto-enrolment programme that has brought millions of workers into pensions for the first time.
There is no justification for this situation to persist. I attach below a release from our Net Pay Action Group, which has been working for many months to produce a solution which can be adopted by the Government to remedy the injustice. I do hope Ministers will act rapidly. The lowest-paid are surely those who need the most help with their pensions and a ‘one-nation’ approach must at the very least ensure the low earners are no longer penalised just by virtue of the way their pension scheme is administered.
- The Conservative Party Manifesto contained a clear commitment: Page 16: “A number of workers, disproportionately women, who earn between £10,000 and £12,500 have been missing out on pension benefits because of a loophole affecting people with net pay pension schemes. We will conduct a comprehensive review to look at how to fix this issue.” In fact, this affects all those earning below £12,500 who were either auto-enrolled or opted in to their employer’s Net Pay scheme. I am delighted that Ministers have agreed to address this.
- The Net Pay Action Group’s policy solution is explained here https://www.litrg.org.uk/sites/default/files/190509-LITRG-briefing-Net-Pay-Arrangements-lower-paid-workers-FINAL.pdf
- This is the release from the Net Pay Action Group made up of pension providers, lawyers, tax specialists, payroll specialists, employers, consumer groups and policy experts:
|Press release from the Net Pay Action Group|
|Release: Immediate: Friday 20 December 2019|
|Campaigners urge government to act quickly on pensions injustice pledge|
|Leading pensions and tax experts are calling on the Government to act quickly to deliver its manifesto promise1 to fix an unfair tax flaw. This flaw means around 1.7 million low-income workers (mostly women) are being unfairly charged 25 per cent more for their pensions as a result of the way their employer pension scheme operates.
The Net Pay Action Group (NPAG)2 – made up of pension providers, lawyers, tax specialists, payroll specialists, employers, consumer groups and policy experts – has warned that this issue threatens to damage public confidence in auto-enrolment, widen the gender pensions gap, and let down those who need to increase their retirement savings most.
Many pension schemes provide the government-funded savings incentives (generally thought of as tax relief) through a system called relief at source (RAS), enabling lower earners to get the taxpayer-funded contribution to their pension automatically. But other pension providers add this money through a net-pay arrangement, which works well for most people, but not for those who earn less than the £12,500 threshold for paying income tax. These people miss out on the taxpayer-funded contribution to their pensions they would otherwise be entitled to and they end up paying it themselves.
As a first step, the Net Pay Action Group is calling on the Government to provide a firm timeline for its pledged review of the system and commit to implementing a solution. It is urging the Government to consider the action group’s proposed solution of a system that would allow HMRC to identify which savers, earning below the income tax threshold, have contributed to a net-pay scheme. HMRC could then provide that government savings incentive, worth 25% of each low-paid worker’s pension contribution, through an existing process3.
Commenting, former Pensions Minister, Baroness Ros Altmann, a member of the Net Pay Action Group, said:
“I’m delighted that the Government has committed to addressing this problem and hope urgent action will be taken to give these low-paid workers, including over one million women, the pension incentives they need and deserve.”
|Notes for editors
1. The 2019 General Election Conservative manifesto stated: “A number of workers, disproportionately women, who earn between £10,000 and £12,500 have been missing out on pension benefits because of a loophole affecting people with net pay pension schemes. We will conduct a comprehensive review to look at how to fix this issue.” For the full text please click here (p16)
2. The members of the Net Pay Action Group are: Low Incomes Tax Reform Group, Baroness Ros Altmann, The Chartered Institute of Payroll Professionals, AgeWage, NOW: Pensions, The People’s Pension, Pension and Lifetime Savings Association, The Investing and Saving Alliance, Association of British Insurers, Trades Union Congress, Age UK, Royal London, Smart Pension, The Pensions Administration Standards Association, Legal & General Investment Management, Ruston Smith
3. The NPAG has put forward a remedy, which we believe would be both simple and comprehensive. It requires HMRC to use the data it already collects via PAYE real-time information (RTI) to identify, after the year end, those who have contributed to an NPA scheme and who have not earned enough to obtain taxpayer incentive. HMRC could then provide that sum via the informal P800 process (or those in Self Assessment could claim relief via their return). This would result in the extra money paid into the pension by these low earners being refunded to them, or that refund being offset against a tax liability. Further details of this proposal are set out here.
This press release has been circulated on behalf of the NPAG by the Low Incomes Tax Reform Group (LITRG) of the Chartered Institute of Taxation