Low earners miss out on £111m in tax relief

Low earners miss out on £111m in tax relief

Low earners could be missing out on up to £111m in tax relief in 2019/20, according to analysis from workplace pension provider Now: Pensions, which has launched a petition asking the government to correct a loophole.

The issue is to do with the net pay anomaly, which means those with incomes below the income tax personal allowance miss out on tax relief when they are auto-enrolled into a pension.

The provider has revised its calculations – which last year showed savers could be missing out on £78m – in line with the recent personal tax allowance increase to £12,500 and the hike in auto enrolment minimum contributions, which have risen from 5 per cent of qualifying earnings to 8 per cent (with 5 per cent contributed by workers).

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It is estimated that there are 1.75m savers with earnings below the personal allowance contributing to a pension scheme with a net pay arrangement which means low paid workers could be missing out on £111m of government tax relief.

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.

Chancellor of the Exchequer Philip Hammond said it is not cost effective for HM Treasury to act on this anomaly.

But Adrian Boulding, director of policy at Now: Pensions, has now launched a petition to Parliament urging the government to reform the payment of pension tax relief.

He said: "When giving evidence to the Work and Pensions committee, John Glen MP claimed that it was not cost-effective for the Treasury to address this anomaly.

"But the reality is that the Treasury are saving themselves £111m every year by leaving this unresolved."

Mr Boulding noted that all savers should receive tax relief regardless of the type of scheme they are in.

He said: "Without urgent action, there’s a real danger that confidence in pension saving, and auto enrolment, will be seriously undermined.

"Now: Pensions has acted unilaterally to address this inequality for our members by committing to top up the tax relief shortfall for those affected – and we remain the only net pay scheme to have done so.

"We are now calling directly on the government to act to end this discrepancy and urge people to share and sign our petition."

According to Paul Nowak, deputy general secretary of Trade Unions Congress, it’s not right that many low-paid workers – mostly women – are missing out on this pensions tax relief.

He said: "The government needs to stop turning a blind eye and ensure all low earners get the same benefit – regardless of what type of scheme their employer chooses."