Tax  

Most low earners missing out on tax relief are women

Most low earners missing out on tax relief are women

The majority of low earners (74 per cent) missing out on pension tax relief are women, the government has revealed.

In a written answer to Parliament yesterday (November 19), Lord Bates, international development minister, said HM Revenue & Customs (HMRC) estimated that 1.2 million individuals earning below the personal allowance are in net pay arrangement pension schemes, and therefore, unable to claim additional tax relief.

Around 74 per cent of these individuals are estimated to be female and 26 per cent male, Lord Bates added.

Article continues after advert

According to research released yesterday (November 19) by Now: Pensions, low earners will miss out on up to £78m in tax relief in 2019 to 2020.

Members of pension schemes who don't pay income tax, such as those whose incomes are less than 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 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.

This means that the number of lower earners missing out on the tax top ups has increased, since the personal allowance was £10,600 in 2015 to 2016.

Lord Bates also revealed that a total of 5.5 million individuals made workplace pension contributions using relief at source in 2015 to 2016.

Around 45 per cent of these individuals are estimated to be female and 55 per cent male, he noted.

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.

But the government hasn't been able to find a straightforward solution to date solve this loophole.

maria.espadinha@ft.com