Women are being unreasonably affected by anomalies within the pension tax system relating to net pay arrangements, a provider has warned.
According to government data, published on Monday (February 24), roughly three quarters of the 1.3m low earners who missed out on pension tax relief in 2016/17 due to being in a net pay arrangement were women.
This shows that these pension rules are unfairly targeting low-paid women and causing them to miss out on a top up on their pension contributions, Gregg McClymont, director of policy at The People’s Pension said.
HM Revenue & Customs revealed a total of 6.8m individuals made workplace pension contributions via relief at source in 2016-17, the latest year in which data is available.
About 45 per cent of these individuals are estimated to be female and 55 per cent male.
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.
Mr McClymont said: “Tax relief should provide an incentive for people to save and help top-up their pension pots, but this flaw is depriving those who most need this boost to their savings.
“It threatens to damage public confidence in auto-enrolment and only serves to keep the gender pensions gap wide open.
“Fairness demands this issue is fixed. We’re calling on the government to deliver on its pledge to review this issue and work to ensure all savers receive the tax relief they’re entitled to.”
The difference between the two 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.
In its election manifesto, the Conservative party promised to fix the tax relief anomaly affecting low earners but it is unknown whether any proposals will be included in next month’s Budget.
Former chancellor of the exchequer Philip Hammond had previously said it was not cost effective for HM Treasury to act on this anomaly.
A government spokesperson said: “The government continues to look at the current differences arising from the two processes for paying pensions tax relief and how it can best balance simplicity, fairness and practicality in the way pensions operate.”
Tim Morris, independent financial adviser at Russell & Co, said: "In my opinion, this net pay issue needs to be much higher up the priority list. Especially with the state pension so overstretched and predicted to run out as early as 2032.
"In the meantime, the pension time bomb keeps ticking and many continue to approach retirement woefully underfunded and underprepared."
amy.austin@ft.com
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