Pensions 

Smart Pension to offer tax relief option for low earners

Smart Pension to offer tax relief option for low earners

Master trust Smart Pension will introduce in 2018 a relief-at-source option which will allow earners in the £11,500 per year threshold to benefit from tax relief.

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.

Smart Pension joins Nest and The People’s Pension, providers which already have this arrangement in place.

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.

Smart Pension will offer both options from next year, as the new arrangement is currently being built into the provider’s system.

According to Andrew Evans, co-founder and chief executive of Smart Pension, as contributions rise in 2018 and again in 2019, “the help that relief-at-source will give to those on lower incomes will be increasingly important as time goes by”.

He said: “Offering a relief-at-source option evens out a complicated system that inadvertently penalises the lower paid and we’re delighted we’ll soon be able to do this for our members.”

According to Smart Pensions, experts claim employees on below £11,500 could be missing out on as much as a 25 per cent boost to their savings via providers that don’t offer relief-at-source.

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.

For Alan Chan, director and chartered financial planner at London-based IFS Wealth & Pensions, this change “was much needed”.

He said: “Net pay arrangements disadvantaged non-tax payers, as they would never have received any relief on their pension contributions.

“But when they come to withdraw money at retirement, they will be taxed on it and so non-taxpayers actually lose out in this type of arrangement.”

maria.espadinha@ft.com