Pension tax relief issues need to be fixed 'urgently'

Pension tax relief issues need to be fixed 'urgently'

The pensions industry has called out the government for failing to address the net pay anomaly issue, after it did not feature in the tax day announcements.

Industry experts renewed calls for the government to fix the issue to ensure all workers receive the pension tax relief they are entitled to.

The net pay anomaly occurs in the pensions tax relief system and means low earners are missing out on a 20 per cent boost on their pension contributions if their scheme operates a net pay arrangement, which is the case with the majority of pension funds in the market.

The Conservative party included the issue in its election manifesto but so far has failed to address it.

Tom Selby, senior analyst at AJ Bell, said the government needed to fix this as a matter of urgency as low earners and women were missing out.

Selby said: “The Conservative manifesto promised to address this issue and yet to date nothing has been done. Failing to treat this with the urgency it demands not only leaves low earners short-changed on tax relief – it also risks undermining confidence in automatic enrolment and retirement saving more broadly.

“Clearly the main focus here needs to be on ensuring all workers receive the pension tax relief they are entitled to, although policymakers will also be mindful of avoiding layering extra burdens on employers currently operating net pay schemes for auto-enrolment.”

Steven Cameron, pensions director at Aegon, agreed. He said: “There are growing numbers of low paid individuals in ‘net pay’ pension schemes who because they don’t pay income tax, don’t get the 20 per cent tax relief their peers in ‘relief at source’ schemes get by default. 

“We urge the Treasury and HMRC to prioritise doing the right thing by those who are currently missing out on their pension tax relief entitlements.”

But he also pointed to a problem with relief at source schemes for higher earners. "Within pensions, higher and additional rate taxpayers who are in ‘relief at source’ schemes have to separately reclaim relief above the basic rate, and there’s anecdotal evidence that many forget to do so," he said.

In July, the Department for Work & Pensions published a 40-page call for evidence which presented the options being considered to address the difference in outcomes between net pay and relief at source pension schemes, as announced at the 2020 Budget.

To align the tax treatment for those contributing to pension schemes with the same incomes but using different methods of tax relief, the government is exploring four methods.

One method involves HM Revenue and Customs paying a bonus to lower earners who are in net pay schemes to put them in the same position as lower earners who are members of relief at source schemes.

Another proposal was for HMRC to apply a standalone charge to recover the top-up given under the relief at source method.