Adrian Boulding, director of policy at Now: Pensions, will be meeting Treasury officials to discuss a potential solution to the pension tax relief issue affecting low earners.
He told FTAdviser he has been invited by the government to talk about 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.
He will present a solution proposed by the Low Incomes Tax Reform Group (LITRG), an initiative from the Chartered Institute of Taxation, which would see HM Revenue & Customs introduce an extra step in the annual assessment it carries – the P800 - which uses real-time information provided by the employer, in order to calculate whether or not an employee has paid the right amount of tax.
This computer-generated calculation could include a check for any unrelieved net-pay contributions, and a 20 per cent tax refund could then be generated on these contributions.
Normally 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.
It is estimated that low earners could be missing out on up to £111m in tax relief in 2019/20 because of this issue.
Treasury officials declined to comment on this matter.
Mr Boulding – who launched a petition to Parliament urging the government to reform the payment of pension tax relief – argued that it would be "a relatively modest system change" for the net pay contributions to be included into the P800 calculations.
He said: "What we need is a change in legislation. Civil servants at HMRC pointed out to us that they are administering the tax rules directly according to legislation."
Mr Boulding noted that he would like to see a change in legislation in the next Finance Act, to be published after the Budget.
He said: "We think we have a solution capable of being administered by HMRC."
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 Chancellor of the Exchequer Philip Hammond has previously said it is not cost effective for HM Treasury to act on this anomaly.
maria.espadinha@ft.com
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