Now: Pensions makes up for tax relief loss

Now: Pensions makes up for tax relief loss

Workplace pension provider Now: Pensions will be topping up pension pots of non-taxpayer members to make up for the income tax relief shortfall.

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 HM Revenue & Customs (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.

It is not available for schemes that operate a net pay arrangement.

The Department for Work & Pensions (DWP) has estimated that around 280,000 people 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.

According to Troy Clutterbuck, interim chief executive of Now: Pensions, “net pay offers savers a number of benefits but, through no fault of their own, non-taxpayers continue to miss out on the government top up they would receive in a relief at source scheme”.

He said: “To address this inequality, for a second year, we are putting our hands in our own pockets to top up these members’ pension pots.”

Currently, the amount these savers are currently missing out is relatively small - around £10 per year for somebody earning £11,000, Mr Clutterbuck said.

However, with “the nil rate tax band rises this amount is going to increase,” he added.

By 2020 to 2021, when the nil rate tax band rises to £12,500, savers could be missing out on as much as £5 per month.

He said: “We continue to talk to the [HM] Treasury and HMRC to find a way to resolve this anomaly over the long term, but progress has been disappointingly slow and a solution to this problem remains elusive.”

According to Alistair Cunningham, financial planning director at Surrey-based Wingate Financial Planning, Now: Pensions initiative is “a good offer”.

It allows to “make up the shortfall caused be a glaring unfairness in the difference between relief at source and net pay schemes,” he said.

Former pensions minister Ros Altmann said she was delighted to see that Now: Pensions would give low-paid customers the tax relief that is denied to them by current HM Treasury rules.

She said: "The company is going to pay the tax relief that these low earners should be entitled to, but which the government is denying them.

"This scandal has been going on for a long time, but the government has failed to address it.

"It is good to see one company taking the moral high ground. Now: Pensions is a net pay scheme, but it has chosen to give the extra money to its low earning customers from its own pocket.

"None of the other net pay schemes has been willing to ensure low earners do not lose out.