Can govt solve the net pay vs relief at source dilemma?

Many of these appear to be forerunners to the introduction of measures which will go some way to pay for the giveaways in the Budget, which were to be expected, as the government attempts to boost the UK’s economic activity during the ongoing Covid-19 crisis.

One of those government publications, but one which is unlikely to result in the collection of a significant amount of tax was a call for evidence, relating to the operation of tax relief on pension contributions.

A distinction between the mechanics of the ‘relief at source’ and ‘net pay’ systems has long created a discrepancy in the outcomes for some savers, in particular lower earners, depending on which system the scheme administrator uses.

Under the relief at source (RAS) system, scheme members make contributions from income which has already been taxed.

The scheme administrator then claims back basic rate tax relief from HMRC on the personal contributions it receives from scheme members.

The saver has to claim back any tax relief above basic rate, usually through their tax return. 

Tax relief is restricted to contributions up to a maximum value of the individual’s taxable earnings.

But because most individuals have an element of taxable earnings on which they pay no tax – their personal allowance – and because non-earners are allowed to make contributions up to a level of £3,600, the RAS system can result in some savers receiving more tax relief on contributions than the tax they paid on their earnings.

Net pay

The net pay tax relief system works differently. 

Under net pay, contributions are made from an individual’s pay before tax is calculated and deducted. 

As the basic rate tax relief is built into the contribution – because none was deducted before the payment to the pension scheme – no further tax relief is reclaimed by either the scheme administrator or the saver.  

For most individuals the two systems result in the same end position. 

The basic rate tax relief is either built into the contribution (net pay) or it is reclaimed by the scheme administrator (RAS). 

The period following chancellor Rishi Sunak’s mini-Budget in July has seen a flurry of publications from various parts of the government covering many aspects of the tax and broader savings framework.