Low earners will miss out on up to £78m in tax relief in 2019/20, according to analysis from workplace pension provider Now: Pensions.
This is because the net pay anomaly, which already means those with incomes below the income tax personal allowance miss out on tax relief when they are auto-enrolled into a pension, will be exacerbated by two factors.
One of these is the increase in the personal allowance to £12,500 in 2019/20 and the other is the hike in auto enrolment minimum contributions - rising from 5 per cent of qualifying earning (with 3 per cent contributed from employees) to 8 per cent (with 5 per cent contributed by workers).
Until now, the anomaly meant the maximum amount a saver could miss out on in tax relief was £34.91. But next year it will rise to £64 because of these changes.
Figures from HM Revenue & Customs (HMRC) indicated that in 2015/16 1.22m people could have been affected by the net pay anomaly.
Assuming were missing out on £64 each, the total tax relief lost will be up to £78m for the 2019/20 tax year, Now: Pensions said.
Members of pension schemes who don't pay income tax, such as those whose incomes are below the personal allowance, 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 most of pension funds in the market.
The difference between these two arrangements became more noticeable after the personal allowance increased to £11,850, which is above the auto-enrolment minimum threshold of £10,000.
But the government hasn’t been able to find a straightforward solution to date solve this loophole.
Now: Pensions, which is a net pay scheme, has been offering a top-up to its members who miss out on this tax relief.
For the third year in a row, the provider has opened applications for its members to make a claim for the last complete tax year of 2017/2018.
Members need to confirm they weren’t taxpayers, which is verified by HMRC.
Troy Clutterbuck, chief executive of Now: Pensions, said the increase in the personal allowance, combined with the rise of auto-enrolment minimum contributions, would "exacerbate this nasty anomaly in the tax system".
He said: "It’s not right that some low earners are missing out on a government top up simply due to the type of pension scheme they are in and the government need to take urgent action to address this inequality.