The Organisation for Economic Co-operation and Development (OECD) has criticised the UK pension tax regime for being "quite unfair" to low earners, who are often not able to receive tax relief on their contributions.
The problem centres on the fact there are two systems currently in use to provide tax relief on contributions, net pay arrangement and relief at source, which ultimately determine whether or not low earners can get tax relief on their pensions.
At present, the threshold for automatic enrolment is £10,000 and the personal allowance for income tax is £11,850. Whether or not workers between these two thresholds get tax relief depends on the scheme their employer has chosen.
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.
Stephanie Payet, private pensions analyst at OECD, told FTAdviser the difference between the two was "quite an issue".
She said: "This is unfair to those low-income earners who are in a net pay arrangement and needs to be fixed."
Ms Payet joins a chorus of UK pension experts who are asking the government to fix this loophole, which according to HM Revenue & Customs (HMRC) may affect around 1.22m workers.
This issue is also classified as one of the reasons why the UK tax regime of private pension arrangements may limit the incentive for people to save for retirement in the country notes published alongside the organisation 263-page report titled OECD Pensions Outlook 2018.
Ms Payet said to her knowledge, no other country analysed in the OECD report had this issue.
She said: "The way the tax system works [in other countries] is the same for everybody, either in the relief at source, or in a net pay arrangement, but there is no duality."
Meanwhile, the 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 solve this issue to date.
Gem Durham, independent financial adviser at Obsidian, said this "is absolutely a loophole that needs fixing, it is wholly unfair that the lowest paid, and therefore arguably most in need of a boost to their savings by way of tax relief are missing out".
She added: "We are desperate in this country to get people saving, but issues like these do nothing to bolster people's faith in pensions or financial services more generally."
maria.espadinha@ft.com
