Treasury to tackle pensions anomaly

Treasury to tackle pensions anomaly

HM Treasury is looking at ways to close a loophole which denies pension tax relief to low earners.

According to FTAdviser's sister newspaper the Financial Times, the government is "looking at the opportunities provided by the move to a modern digital tax system to tackle any differences of treatment in provision of tax relief for pensions".

But the Treasury did not indicate when a fix to the problem might come into effect.

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Last week former pensions ministers Sir Steve Webb and Baroness Ros Altmann, alongside other pension specialists, wrote to Chancellor of the Exchequer Philip Hammond calling for a solution.

They urged the government to introduce a clause in the next Finance Bill to address this issue which, according to calculations based on figures from HM Revenue & Customs (HMRC) – could be affecting 1.22m people.

If the Treasury were to take action it would represent a change of stance from government after previously insisting it was "up to employers, not government, to decide which scheme best suits the needs of their employees".

Members of pension schemes who don't pay income tax are granted basic rate tax relief of 20 per cent on pension contributions up to £2,880 a year.

In practice this means HMRC will top up a net contribution of £2,880 to a gross £3,600.

But this tax relief is only available where the pension scheme operates on a relief-at-source basis, which is only accessible through 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 income tax personal allowance increased to £11,850, which is above the auto-enrolment minimum threshold of £10,000.

This tax loophole has been branded the "next payment protection insurance scandal", with only three of the top 17 master trust providers in the UK market offering relief at source to their members.

Sir Steve, director of policy at Royal London, said: "It would be great news if the government was finally to address this issue.

"It is totally unfair on lower paid workers that they miss out on tax relief simply because of the pension scheme their employer has chosen. In a world of ‘making tax digital’ it ought to be possible for HMRC to make sure that all workers can benefit from tax relief."