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

This information allows HMRC to make adjustments to individuals’ tax positions during the tax year, meaning any over or underpayment of tax at the end of the year should be smaller.

The discrepancy the government is now looking to address is not new.

The proposal would involve the government using RTI end of tax year systems to identify individuals who had been members of net pay schemes, then calculating the bonus for those who were disadvantaged in relation to equivalent members of RAS pension schemes.  

The level of the bonus would vary depending on the personal circumstances of the individual.

Although it would be calculated based on the RTI already reported to HMRC, it would require a significant enhancement in the way those systems work.

Once the level of the bonus had been calculated, which it is anticipated would be well after the end of the tax year, it would still need to be claimed by the individual entitled to it.

The government does not appear to view this option positively.  The primary reasons it gives are the significant systems changes that would be introduced for savers, employers, scheme administrators, and HMRC. 

Even with those complications the bonus would be paid a long time after the contributions were paid; there is the possibility that savers will not claim it; where it is claimed there will be additional costs to the Government; and the system will result in the bonus being paid to the individual rather than to their pension scheme, which is where basic rate tax relief is paid under RAS.

Option 2 – standalone charge

This proposal is broadly the opposite of Option 1. 

Rather than paying a bonus to those who are worse off in net pay schemes than under RAS schemes, the proposal would involve tax relief being taken off those who are better off as members of RAS schemes.

To work it would rely on more information about earnings being provided to scheme administrators about an individual’s earnings.

Administrators of RAS schemes would then be required to pass this information on to HMRC in addition to the annual information they already provide about the level of pension contributions they’ve received.

The call for evidence appears to assume this information will be provided to administrators by employers, ignoring the fact that many personal pension schemes are established without the involvement of an employer.

Most Sipps are set up and run by members without the employer having any reason to even know that the pension exists.

The Treasury’s main concern with this option is that it would involve taking back tax relief from the lowest earners, which doesn’t seem particularly consistent with the government’s broader ‘levelling up’ aim.