NOW: Pensions to top up non taxpayers’ pension pots to offset net pay income tax relief shortfall for a second year

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For immediate release: 13 September 2017


Workplace pension provider NOW: Pensions has today confirmed that for the 2016/2017 tax year it will again make up the income tax relief shortfall for members of its scheme that aren’t taxpayers (typically those earning less than £11,000) and are currently missing out on the tax relief that they would receive in a relief at source scheme.

The vast majority of occupational and trust based schemes operate on a net pay basis but NOW: Pensions is the only net pay scheme to offer a top up to its membership.

Troy Clutterbuck, Interim CEO of NOW: Pensions said: “Net pay offers savers a number of benefits but, through no fault of their own, non taxpayers continue to miss out on the government top up they would receive in a relief at source scheme.

“To address this inequality, for a second year, we are putting our hands in our own pockets to top up these members’ pension pots.”

Clutterbuck continues: “While the amounts these savers are currently missing out on is relatively small, around £10 per year for somebody earning £11,000 – as the nil rate tax band rises this amount is going to increase. We continue to talk to the Treasury and HMRC to find a way to resolve this anomaly over the long term but progress has been disappointingly slow and a solution to this problem remains elusive.”

The net pay anomaly

Members of pension schemes who don’t pay income tax, are nonetheless permitted to basic rate tax relief (20%) on pension contributions up to £2,880 a year. In practice this means that HMRC will top up a net contribution of £2,880 to a gross £3,600.

However, this tax relief is only available where the pension scheme operates on a relief at source basis. It is not available for schemes that operate a net pay arrangement.

Until April 2015, both the nil rate tax band and the auto enrolment earnings threshold were £10,000 pa. That meant that employees eligible for auto enrolment were also income taxpayers, and therefore received tax relief regardless of which method of contribution their pension administrator adopted.

From April 2015, the auto enrolment earnings threshold remained at £10,000, but the nil rate tax band was increased to £10,600. It rose to £11,000 for the 2016/2017 tax year. This separation created a tax anomaly in that members with salaries between the two figures are disadvantaged under net pay arrangements.

Differences between net pay and relief at source

With net pay, contributions are deducted from the member’s gross salary before tax is deducted.  Therefore, whether the member pays 20%, 40% or 45% tax, they enjoy full tax relief up front and

immediate investment of the gross contribution. However, in a net pay scheme, non-taxpayers will not receive the tax relief they are entitled to.

In relief at source arrangement, contributions are taken from the member’s net salary after tax. The amount deducted is 80% of the gross contribution.

Under relief at source, non-taxpayers still receive tax relief at 20% and this relief is claimed from HMRC on behalf of the member, and invested directly into their pension fund.

Higher rate tax payers have to claim back the difference up to 40% directly from HMRC, normally through an adjustment to their tax code. Additional rate taxpayers are only permitted to make the additional claim through their tax return form.

How much are savers missing out on?

For somebody earning £11,000, paying auto enrolment minimum contributions, the maximum they are missing out on is £10.35 per year. But, as the nil rate tax band increases this will grow so that by 2020/21 when the nil rate tax band rises to £12,500 savers could be missing out on as much as £5.00 per month.

How will the top up work?

  • Information about the top up will be included within members’ 2016/17 benefit statements and communicated to employers
  • Members who do not pay income tax on their earnings will be directed to a short claim form on the NOW: Pensions website and a letter of authority, permitting HMRC to divulge tax details to NOW: Pensions in respect of the 2016/17 tax year
  • The completed claim form and letter of authority would need to be submitted to NOW: Pensions
  • NOW: Pensions would then liaise with HMRC to confirm that these members do not pay tax
  • Once confirmed, NOW: Pensions will credit members’ pension pots with the income tax relief they would have received in a relief at source arrangement

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For further information:

Amy Mankelow
NOW: Pensions
Tel: 07887 604 640

Cheriton Lee
NOW: Pensions
Tel: 0203 948 9236

Notes to editors

NOW: Pensions @nowpensions

NOW: Pensions is one of the UK’s largest workplace pension providers with over a million members and tens of thousands of employers from a wide range of sectors. A company wholly owned by Danish pension scheme ATP; one of Europe’s largest pension funds. NOW: Pensions entered the UK market in 2011 with a simple and cost effective workplace pension designed specifically with the auto enrolment market in mind.

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NOW: Pensions' risk management and diversified growth fund are state of the art. — Win Robbins, former Head of European Fixed Income Barclays Global Investors
Why do we insist on having a choice of fund manager when the evidence shows there is usually no benefit to be gained…and there is always a negative impact in terms of cost? — Anthony Hilton financial editor of the Evening Standard writing in Pensions World, June 2013
“Redington’s Investment Committee assigned an Approved Rating to the NPI DGF and positive on the fund.” — Redington
I firmly believe in NOW: Pensions' principle that everyone deserves the right to a better retirement. I look forward to being part of the team which aims to achieve this in the UK. — Win Robbins, former Head of European Fixed Income Barclays Global Investors
ATP comes to the UK pensions world with the highest commendations from the Danish trade unions, employers and government. NOW: Pensions' offering in the UK will be high quality, low cost, and honest and I'm proud to be associated with it. — John Monks, member of House of Lords and former General Secretary of ETUC and TUC