Workplace pension provider Now: Pension will be topping up pension pots of non-taxpayer members, to make up for the income tax relief shortfall, for the 2017 to 2018 and 2018 to 2019 tax years.
Currently, as many as 300,000 low paid earners are being denied tax relief, which is dependent on the type of scheme their employer chooses for auto-enrolment.
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 handful 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 £11,850 – which is above the auto-enrolment minimum threshold of £10,000.
HM Treasury has declined calls to deal with 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 has been branded the "next payment protection insurance (PPI) scandal", with only three of the top 17 master trust providers in the UK market offering relief at source to their members.
Other master trusts are aware of this problem, with Smart Pension pledging last year to introduce a relief at source option during this year.
Currently, if a member of Now: Pensions, which operates a net pay arrangement, is a low earner and is owed tax relief, he will have to fill out a short claim form on the provider's website, which includes authority for HMRC to divulge tax details to to the provider in respect of the tax year.
After the document is submitted to the provider, Now: Pensions would then liaise with HMRC to confirm that these members do not pay tax.
Once confirmed, the company will credit members' pension pots with the income tax relief they would have received in a relief at source arrangement.
According to Troy Clutterbuck, chief executive of Now: Pensions, there is no "resolution to this growing issue in sight".
He said: "We are once again putting our hands in our own pockets to address this inequality.
"With auto-enrolment minimum contributions increasing, offering this top up will cost more than in previous years but we firmly believe it’s the right thing to do for our members."
Auto-enrolment minimum pension contributions increased last month, from 2 per cent to 5 per cent.
In 2019 it will increase again to 8 per cent, with the employee paying 5 per cent.
There are now more than nine million people auto-enrolled in a workplace pension scheme.
Mr Clutterbuck added: "We won't allow this issue to be swept under the carpet and we will continue to press the Treasury to find a long-term solution. But, with so many competing priorities, this could be some way off."
maria.espadinha@ft.com
