Nearly half a million low paid workers could be at risk of missing out on pension tax relief on their workplace pension contributions by 2020 depending on which type of scheme their employer uses.
If workers who earn between £10,000, when auto-enrolment kicks in, and the current income tax threshold of £11,500 are part of a workplace pension scheme that applies pension tax relief using the ‘net pay arrangement’ system, they will not get tax relief because they are under the tax threshold.
Those in the same earnings bracket whose employers use a ‘relief at source’ system would get tax relief.
The Department for Workplace Pensions (DWP) has estimated that around 280,000 who earn between £10,000 and £11,500 would not benefit from tax relief on their contributions if enrolled in a pension scheme that uses a net pay arrangement.
This problem is set to become worse when the personal tax relief allowance is increase to its target level of £12,500 by 2020, which provider Royal London has estimated would impact around half a million workers.
Even more could be caught in this gap once the earnings trigger for auto enrolment is cut to below £10,000 to include more workers.
Steve Webb, Director of Policy at Royal London said that a low paid worker is effectively paying £80 per £100 pension contribution if they get standard tax relief, but the full £100 if they do not.
He added that this all depends on “the lottery” of whether their employer has chosen a scheme which offers tax relief at source rather than using the net pay arrangement.
“Firms and workers cannot be expected to know obscure facts like how tax relief is administered in different sorts of pension schemes. DWP and HMRC need to sort this issue out so that all low-paid workers get the help to which they are entitled with saving for a pension.”