The Department for Work and Pensions (DWP) is looking at a loophole which is currently leaving as many as 300,000 low paid earners without tax relief.
The Parliamentary under-secretary of state for pensions, Baroness Buscombe, revealed earlier this week at a debate at the House of Lords that the “government will examine the processes for payment of pensions tax relief for individuals to explore the current difference in treatment,” alongside the work being done on the auto-enrolment review, published last year.
Former pensions minister Baroness Ros Altmann, which has been calling for the government to tackle this problem, told FTAdviser that she has been having meetings with the DWP about this matter.
She said: “The Department may be looking at this but it may also require that the Treasury is in agreement.”
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 contribution of £2,880 to £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 £11,850 – which is above the auto-enrolment minimum threshold of £10,000.
Baroness Altmann said: “I believe this is a huge danger to auto enrolment and pensions confidence which must be addressed really urgently.
“More people are being impacted and they are each losing more money.”
Baroness Buscombe explained that the government recognises “the different impacts on pension contributions for workers earning below the personal allowance”.
She added: “But to date it has not been possible to identify any straightforward or proportionate means to align the effects of the net pay and relief at source mechanisms more closely for this population.”
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 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 2018.
Jesal Mistry, head of scheme design and provider evaluation at consultant Hymans Robertson, argued that it’s great to see the matter rising up the agenda.
However, it’s unlikely that it will be “a quick fix,” he said.
He added: “It is crucial that both the government and the industry start to think creatively and seriously about how this inequality can be addressed.
“For example, we could amend the current income tax system to provide members with some form of credit or look to provide a ‘bonus’ into their pension of the amount they should have received in tax relief.”
Baroness Buscombe hinted that the government might launch a consultation on this matter.
She said: “[The goal is to] ensure that we can make the most of any new opportunities that emerge, balancing simplicity, fairness and practicality while engaging with stakeholders to seek their views.”
Tom Selby, senior analyst at AJ Bell, argued that “denying the lowest earning savers the tax relief they are due is clearly wrong, and the government is right to consider solutions to deal with this specific problem”.
He said: “By raising the issue of pension tax relief reform, however, Baroness Buscombe will inevitably inflame concerns more radical changes could be pursued.
“Given the £20bn funding promise to the NHS made by the Prime Minister early this month, many now fear retirement savings incentives will be caught in the crossfire.”
maria.espadinha@ft.com
