HM Treasury  

Tax relief loophole 'not cost effective' to fix

Tax relief loophole 'not cost effective' to fix

The Chancellor of the Exchequer has said it is not cost effective for HM Treasury to close a loophole which denies pensions tax relief to low earners.

In a Treasury committee hearing on April 25 Conservative MP Steve Baker asked Philip Hammond to explain why the Treasury was not able act on the issue, which sees those earning less than the personal allowance miss out on pension tax credits.

Mr Baker said: "Savers earning less than the personal allowance are unable to be credited with tax relief if they are enrolled in a net pay arrangement.

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"People are missing out on about £35 a year on tax credits into their pensions but the amount people could be missing out on can range to up to £720 a year."

Mr Hammond said it was not cost effective to act on this anomaly, repeating the view previously expressed by John Glen, economic secretary to the Treasury, in front of the Work and Pensions committee.

The Chancellor said: "John Glen is right in saying that the challenge for us with anything to do with auto enrolment and small scale savings is to make an intervention cost effective where it cannot be done automatically. I will talk to the economic secretary and will write to the committee."

Some members of pension schemes who don't pay income tax are granted basic rate tax relief of 20 per cent on pension contributions of 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.

Former pension ministers Baroness Altmann and Sir Steve Webb wrote a letter to Mr Hammond in October 2018 urging the government to introduce a clause in the Finance Bill to address the issue which, according to their calculations based on figures from HM Revenue & Customs from 2015/16, could be affecting 1.22m people.

Mr Webb, director of Policy at Royal London, said: "It is totally unacceptable that low-paid workers face a lottery as to whether or not they get tax relief on their pension contributions. We know that large numbers of workers are affected and the total loss could be around £100m a year. 

"On that basis, it is hard to see how the Treasury can claim that taking action to fix the problem might not be cost-effective.

"Whilst HMRC is under great pressure because of Brexit preparations, it should give this issue the priority that it deserves and end this injustice."