A government policy in which as many as 300,000 low paid earners are often being denied 20 per cent tax relief added to their pensions has been branded the 'next payment protection insurance (PPI) scandal’.
Andy Agathangelou, chair of the Transparency Task Force, which aims to clean up the financial services industry, said at a conference organised by the Westminster Business Forum in London yesterday (20 March), that people could be “talking to solicitors about how they were disadvantaged and experienced material detriment” due to this issue.
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, 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.
Mr Agathangelou said: “[It is possible] that people will use the courts, class action, groups actions, to defend what they will see as material detriment to themselves.
“If someone can show that they have lost out financially, because their employer didn't make available to them the right kind of pension scheme from a net pay/relief at source issue, how can you conclude that there will be anything other than PPI, as an example.”
Former pensions ministers Ros Altmann and Steve Webb have both argued that the HM Treasury needs to act to allow low earners to claim the tax relief they are entitled to.
However, the Treasury has denied taking any action on this matter, saying previously that “it is up to employers, not government, to decide which scheme best suits the needs of their employees”.
The number of low earners that won’t be able to get this tax relief is set to rise, since the individual allowance will increase from £11,500 to £11,850 from April, in line with inflation.
Mr Agathangelou added: “This is something the industry really needs to have a grown-up conversation about, to mitigate the risk.
“I'm very very worried about this. I don't know what the answer is, it might be that policymakers mandate that every employer must provide both options, but how can we be comfortable as an industry when we know that there are people losing out financially in the long term because they were in the wrong scheme for them.”
Nest and The People’s Pension are two of the providers which already offer relief-at-source.
Smart Pension announced in October that this option would be available from next year onwards.