HM Treasury has said it will not making changes to a rule in which as many as 300,000 low paid earners are often being denied 20 per cent tax relief added to their pensions.
Members of pension schemes who don't pay income tax are nonetheless permitted to basic rate tax relief (20 per cent) 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, which is only accessible through less than a hand full of companies.
It is not available for schemes that operate a net pay arrangement, which are the majority of pension funds in the market.
The difference between these two arrangements has become more noticeable since the nil rate income tax band has increased – currently at £11,500 – which is above the auto-enrolment minimum threshold, of £10,000.
This means that there are individuals saving into pensions without paying tax.
Former pensions ministers Ros Altmann and Steve Webb have both argued that the Treasury needs to act to allow low earners to claim the tax relief they are entitled to.
Ms Altmann said: “As auto-enrolment pension contributions are set to quadruple by 2019, the amount of money these low earners lose out on will increase sharply.”
A spokeswoman at the Treasury declined to comment if this is a matter being considered, saying that she “can’t speculate on policy ahead of a fiscal event,” as the government is preparing its Autumn budget.
However, she said that “it is up to employers, not government, to decide which scheme best suits the needs of their employees”.
She added: “The Pensions Regulator provides guidance to help employers make that decision.”
But Mr Webb, head of policy at Royal London, argued that leaving to employers to solve this situation “is ridiculous”.
He said: “The government can't just wash its hands of it.
“They can't leave it to providers to invent even more complicated patches to fix a problem which the government really needs to fix.”
Nest and The People’s Pension are two of the providers which already offer relief-at-source.
Smart Pension announced last week that this option would be available from next year onwards.
Now: Pensions, which has been in talks with the HMRC to find a solution for this issue on the long-term, announced last month that it will be topping up pension pots of non-taxpayer members to make up for the income tax relief shortfall.
The Department for Work & Pensions (DWP) has estimated that around 280,000 people who earn between £10,000 and £11,500 wouldn’t benefit from tax relief on their contributions if enrolled in a pension scheme that uses a net pay arrangement.
Low earners will be missing on even more tax relief by 2020 to 2021. The nil rate tax band will be rising to £12,500, and savers could be missing out on as much as £5 per month, said Now:Pensions.