Only three of the top 17 master trust providers allow their lowest paid members to claim additional pension tax relief, according to research from Hymans Robertson.
National Employment Savings Trust (Nest), The People’s Pension and Legal and General (L&G) are the workplace providers currently offering a relief at source option to their member, which can add as much as a 20 per cent government bonus to their retirement savings pot, said the consultant.
Relief at source
The People's Pension
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 £11,8500 – which is above the auto-enrolment minimum threshold of £10,000.
According to Jesal Mistry, head of scheme design and provider evaluation at Hymans Robertson, master trusts have evolved from being a relatively niche option to being increasingly seen as the defined contribution (DC) vehicle of choice.
He said: "They have grown to represent over 35 per cent of the workplace savings market and account for the savings of over seven million defined contribution (DC) scheme members in the UK.
"The fact that only three of the master trusts we surveyed offered tax relief at source is not just surprising, but a major concern as it could mean thousands of individuals auto-enrolled are not receiving the tax relief they were promised."
Former pensions ministers Ros Altmann and Sir 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".
This tax loophole, in which as many as 300,000 low paid earners are being denied tax relief, has been branded the "next payment protection insurance (PPI) scandal".
Mr Mistry added: "The tripling of auto-enrolment minimum contributions in April this year to 3 per cent, and the planned further rise to 5 per cent by 2019, although necessary, will serve to further compound this issue for an individual that is already not receiving the tax relief to which they are entitled.”
"So, how can this issue be resolved? As our research shows a small number of providers are already able to accommodate a tax-relief at source system. For those that don't, a sizable investment is necessary to adapt their administration system.