Tax relief anomaly harming low-earners

UK to tackle pension anomaly hitting 1.2m low earners

The Treasury is taking steps to address a UK tax anomaly that has seen an estimated 1.2m low earners miss out on government top-ups on their pension contributions.

The government on Tuesday confirmed it was looking at ways to “tackle any differences” in how pensions tax relief was provided, as industry and campaigners said the anomaly was a “huge injustice” and a “scandal”.

The government allows savers to claim upfront tax relief, in the form of a government top-up, on what they pay into a pension, to encourage them to provide for later life.

Relief is paid at the same rate as income tax, which is levied at a basic rate of 20 per cent, a higher rate of 40 per cent or an additional rate of 45 per cent.

However, those not earning enough to pay tax, or less than £11,850 a year, can still qualify for the top-up on their pension contributions, up to a set amount.

This means a non-taxpayer can pay up to £2,880 a year into a pension and have this topped up to £3,600 by the government. Most non-taxpayers, however, contribute a tiny fraction of the maximum.

A technical quirk in the tax system has meant that low earners in some pension schemes, known as “net pay” arrangements, have been denied the top-up.

Campaigners estimate about 1.2m low earners are in schemes that have no mechanism to pay them their government contribution, and are probably missing out on an average of about £40 a year due to the technical quirk.

Last week, two former pension ministers, pension providers, unions and campaign groups joined forces to urge the chancellor to urgently find ways to address the “net pay” anomaly.

On Tuesday, the government said it was “looking at the opportunities provided by the move to a modern digital tax system to tackle any differences of treatment in provision of tax relief for pensions”.

The Treasury did not indicate when a fix to the problem might come into effect.

Ros Altmann, the former pensions minister who has campaigned to highlight the net pay anomaly, said she was “delighted that the Treasury was working on a solution for this injustice to the lowest earners in automatic enrolment”.

“This scandal could undermine the whole auto-enrolment programme and must be stopped straight away, before more people lose money in this unfair system,” she said.

Since 2012 employers have been required to choose a workplace pension for staff and automatically enrol eligible workers into the scheme. Nearly 10m have been enrolled into workplace pensions under this programme.

Workers who don’t earn enough to pay tax, who have been enrolled into pension schemes using a “relief at source” arrangement, as opposed to “net pay” can receive tax relief.

Earlier this year, analysis by Hymans Robertson, the consultancy, found only three out of 17 UK pension providers offering multi-employer retirement plans, known as Master Trusts, had systems in place to pay tax relief to all savers.

Date published: 10 October 2018

Josephine Cumbo, Pensions Correspondent


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