Automatic enrolment  

Auto-enrolment review considering tax loophole

Auto-enrolment review considering tax loophole

The current tax loophole which means that some low earners can’t access tax relief for their pension is being looked into as part of the automatic enrolment review, Standard Life's Jamie Jenkins has revealed.

Members of pension schemes who don't pay income tax are 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.

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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.

If this minimum trigger is lowered, which is one of the issues being considered in the review, more low earners could be caught in this loophole.

The head of pension strategy at Standard Life, and chairman of the Department of Work & Pensions (DWP) external advisory group supporting the government’s auto-enrolment review, told FTAdviser that this problem is “not a specific part of the review, but it is a consideration”.

He said: “It was considered, like many other factors.

"You have to look at what the implications are of any decision changing the [minimum auto-enrolment] trigger.”

The DWP announced last year a review of auto-enrolment, five years after its launch. The report, with final recommendations, will be published in December.

Mr Jenkins declined to comment on the result of this evaluation, since the report hasn’t been published yet.

However, he dismissed the low earners problem with net pay arrangement schemes as a problem.

He said: “The problem does exist, but it applies to a confined number of schemes where they operate on a net pay basis, and that is a diminishing number.

"It affects a decreasing number of members, as most schemes have made adjustments to resolve that."

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.

Recently, the Treasury rejected calls to change the rules in order to end the tax loophole, saying that it is up to employers to choose the scheme they enrol their workers in.

Some schemes have stepped-in and are funding the difference themselves. This is the case with Now: Pensions, which has been in talks with the HMRC to find a solution for this issue.

According to William Burrows, retirement director at Better Retirement, the low earners tax issue "is clearly on the radar".

He said: "But unless a solution is found, the problem will only get worse and more and more people will lose out by not getting the tax relief bonus which should rightly be theirs.”