Pensions - Articles - Low earners to miss out on pension tax top up

As announced in the Budget, from April 2019 the personal allowance will increase to £12,500. While this is good news for many lower paid workers, it will increase both the number of people affected by the net pay anomaly and the amount of tax relief they will miss out on each year.

 In the current tax year, the maximum amount that a saver in a net pay scheme could miss out on is £34.91. But, for the 2019/20 tax year this will rise to £64 due to the increase in the personal allowance and the increase in auto enrolment minimum contributions - rising from 5% of qualifying earning (with 3% contributed from employees) to 8% of qualifying earnings (with 5% contributed by employees).

 Figures from HMRC indicate that in 2015/16, 1.22 million people could have been affected by net pay anomaly – this includes those automatically enrolled as well as workers already in occupational schemes. This number will rise, but even on this conservative estimate, lower paid workers – more likely to be women - across the country could be missing out on up to £78million of tax relief for the 2019/20 tax year.

 The net pay anomaly
 Under net pay arrangements, the pension contribution is deducted before the tax is calculated. In RAS arrangements, the pension contribution is deducted after tax is calculated and HMRC later send the tax relief, at the basic rate (20%), to the pension scheme.

 The vast majority of occupational pension schemes operate on a net pay basis while traditionally contract-based schemes have operated on a RAS basis.

 Members of RAS pension schemes who do not pay income tax are nonetheless, entitled to basic rate tax relief on pension contributions up to £2,880 a year.

 However, this tax relief is not available for non-taxpayers in net pay schemes.

 Research conducted by NOW: Pensions with 691 senior business decision makers revealed 52% have a net pay scheme, 20% have a relief at source scheme while 31% don’t know.

 NOW: Pensions’ net pay top up
 For the third year in a row, NOW: Pensions has committed to making up the income tax relief shortfall for members of its scheme who aren’t taxpayers. NOW: Pensions is the only net pay scheme to offer this top up. To make a claim for the last complete tax year, 2017/2018, members simply need to fill in a short only form the confirm that they weren’t taxpayers which is verified by HMRC.

 All information can be found here.

 Troy Clutterbuck, CEO of NOW: Pensions said: “The increase in the personal allowance, combined with the rise of auto enrolment minimum contributions will exacerbate this nasty anomaly in the tax system.

 “It’s not right that some low earners are missing out on a government top up simply due to the type of pension scheme they are in and the government need to take urgent action to address this inequality.

 “In the meantime, we don’t want any of our members to miss out so we are happy to put our hands in our pockets to make up the difference and we urge members to take a minute out of their day to make a claim.”

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