Help us reform the payment of pension tax relief to ensure that no low earners miss out

Sign our petition to help us stop nearly 2m of the lowest earners across the UK missing out on a tax top up from the government. 

We’ve previously spoken about a loophole whereby, depending on which type of scheme pension savers are in, some low earners miss out on a tax top up from the government.

Together with a number of other organisations, we’ve been raising awareness of this issue and trying to get the Government to take action to make sure that all low earners receive tax relief regardless of which type of scheme they are in and without having to ask HMRC for it. But, our pleas have been falling on deaf ears and we’d really value your help in getting this issue this attention it deserves.

What’s the problem?

The issue arises primarily for workers who have to be enrolled into a pension because they earn more than £10,000 per year but who are earning under the income tax threshold – now £12,500 per year. It is thought that around three quarters of these workers are women in low-paid or part-time jobs.

Whether or not these workers benefit from pension tax relief depends on what sort of pension arrangement their employer has chosen – either ‘Net Pay’ or ‘Relief at Source’ (RAS).

The vast majority of occupational pension schemes (and in most public service pension schemes) operate on a Net Pay basis while traditionally, contract-based schemes have operated on a RAS basis.

For savers in Net Pay schemes, pension contributions are deducted from pay before income tax has been taken off, and savers receive tax relief automatically and immediately based on their marginal rate.

In a Relief at Source scheme, pension contributions are deducted from pay after income tax has been taken off, and HMRC then sends tax relief back to the scheme at the basic rate of 20%, which is then added to all employees’ savings.

Anyone paying higher tax rates may claim any further relief directly from HMRC.  If they don’t remember to do this, they won’t get it which is why many employers prefer the Net Pay arrangement.

This means that savers who earn under the £12,500 threshold for paying income tax in a Net Pay scheme do not receive the 20% tax relief they would receive in a Relief at Source scheme.

How many people are affected?

HMRC estimates for 2016-17, that 1.33m people with earnings below the personal allowance (then £11,000) contributed into a pension scheme via net pay tax relief arrangements.

Since then, the personal allowance has increased to £12,500 and Royal London estimate that 1.75 million people could now be affected largely as a result of automatic enrolment bringing millions more low-paid workers into pension saving.

How much are they missing out on?

Somebody earning £12,500 a year, paying auto enrolment minimum contributions of 5%, based on qualifying earnings, will be missing out on £63.64 in the 2019/20 tax year.

How you can help us to change it

We think all low earners should receive tax relief regardless of the type of scheme they are in and we want the Government to take action. This is why we’ve placed a petition on the Parliament website calling on the Government to ensure that all low earners receive tax relief regardless of which type of scheme they are in and without having to ask HMRC for it.

If you agree, sign the petition before it closes on 14 December 2019.

Tell your friends, family and colleagues about the petition and, if you can, share our posts on social media.

It’s unfair that the lowest earners in our society are missing out on this much needed top up to their pension through no fault of their own. We’d really appreciated your help in trying to change the system.

Troy Clutterbuck, CEO, NOW: Pensions

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