Tax 

Million low earners miss out on tax relief

Million low earners miss out on tax relief

At least 1.3m low earners are missing out on pension tax relief because of the scheme they were enrolled in.

According to figures from the government, the issue affects people who have been enrolled in a net pay arrangement scheme and women are particularly affected.

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.

The data was revealed on Wednesday (June 19) by Lord Young of Cookham in a written Parliamentary response to Baroness Ros Altmann, former pensions minister, with the caveat that there may be individuals who have both relief at source and net pay pension schemes.

The number of people not getting tax relief are as follows:

 

2014/15

2015/16

2016/17

Net pay arrangement (figures in thousands)

Female

800

900

1,000

Male

300

300

300

Total

1,100

1,200

1,300

Relief at source (figures in thousands)

Female

400

500

700

Male

300

300

400

Total

600

900

1,100

Lord Young noted, however, that an estimate for the number of taxpayers with relief at source pensions who fail to claim higher rate tax relief, and how much higher rate tax relief is unclaimed each year, is not available.

The difference between the two pension arrangements has become more noticeable since the income tax personal allowance increased to £12,500, which is above the auto-enrolment minimum threshold of £10,000.

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

FTAdviser reported on Monday (June 17) that low earners could be missing out on up to £111m in tax relief in 2019/20, according to analysis from Now: Pensions.

The workplace pension provider estimated there are 1.75m savers with earnings below the personal allowance contributing to a pension scheme with a net pay arrangement.

This figures quoted by Lord Young of Cookham are the most recent HM Revenue & Customs has available but they are three years old.

Baroness Altmann told FTAdviser she is disappointed that there aren’t any more up to date numbers, and that the figures from HMRC are from before the latest auto-enrolment minimum contribution hike.

Adrian Boulding, director of policy at Now: Pensions – which launched a petition to Parliament urging the government to reform the payment of pension tax relief – said the number of low earners has grown for three reasons.

First, the roll out of auto-enrolment has been completed across all employers. Secondly, the increase in the personal allowance to £12,500 has made a lot more people non-taxpayers.

And finally, the increase in the living wage has lifted a lot of part-timers over the £10,000 threshold at which their employer has to automatically enrol them.