Budget 2020: Chancellor launches probe into net pay anomaly

Budget 2020: Chancellor launches probe into net pay anomaly

The government is launching a consultation to address an anomaly in the pensions tax relief system which means low earners are missing out on a 20 per cent boost on their pension contributions.

The Conservative party had already promised to fix this issue in its election manifesto and the government has now stuck to its promise and launched a call for evidence to review options to address this issue.

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 difference between these two arrangements became more noticeable after the income tax personal allowance increased to £12,500, which is above the auto-enrolment minimum threshold of £10,000.

In the documents accompanying the Budget today, the government stated it was "committed to reviewing options for addressing these differences" and will shortly publish a call for evidence on pensions tax relief administration. 

Steven Cameron, pensions director at Aegon, welcomed the government's action but was still concerned that the issue may not be fixed in the near future.

Mr Cameron said: "We’re pleased that the Budget mentions one of the greatest injustices in the pensions tax relief system, which currently means low earners who are not paying income tax in certain ‘net pay’ workplace pension schemes are not receiving the 20 per cent tax relief on their pension contributions to which they are entitled.

“However rather than introducing an immediate remedy, the government is to issue a consultation which means this is unlikely to be sorted before April 2021 as implementing change in the tax year would be highly problematic.

"This means low earners face another  year in which their pension contributions will be losing out on tax relief which is one of the main benefits of pension saving.”

Former chancellor Philip Hammond had previously said it was not cost effective for HM Treasury to act on this anomaly.

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