Low earners missing out on tax top-up worth up to £111 million a year

• In April 2019, the personal allowance increased from £11,850 to £12,500 increasing the amount of tax relief low paid workers in net pay schemes are missing out on from £34.91 to £63.64 a year.
• HMRC estimates for 2016-17 show that 1.33m people with earnings below the personal allowance (then £11,000) contributed into a pension scheme via net pay tax relief arrangements.
• Today, it is estimated that 1.75 million savers are affected which means that the country’s lowest earners could be missing out on up to £111 million of pensions tax relief.
• NOW: Pensions launches Parliamentary petition to urge government to take action to ensure all savers receive tax relief regardless of the type of scheme they are in.

New analysis by NOW: Pensions reveals that across the country, low earners could be missing out on up to £111 million of government tax relief through no fault of their own. This is an increase of 43% on the previous tax year when NOW: Pensions calculated that savers were missing out on £78 million.

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 estimated 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).

In April 2019, the increase in tax-free personal allowance coincided with the increase in auto enrolment minimum contributions from 5% of qualifying earning (with 3% contributed from employees) to 8% of qualifying earnings (with 5% contributed by employees). The combined impact has increased the amount that a saver in a Net Pay scheme could miss out on from £34.91 to £63.64 per year.

It is estimated that there are 1.75 million savers with earnings below the personal allowance contributing to a pension scheme with a Net Pay arrangement which means that, low paid workers could be missing out on £111 million of government tax relief.

Adrian Boulding, Director of Policy at NOW: Pensions said: “When giving evidence to the Work and Pensions Committee, John Glen MP claimed that it was not cost-effective, for the Treasury to address this anomaly. But the reality is that the Treasury are saving themselves £111 million every year by leaving this unresolved.

“All savers should receive tax relief regardless of the type of scheme they are in and without urgent action there’s a real danger that confidence in pension saving, and auto enrolment, will be seriously undermined.

“NOW: Pensions has acted unilaterally to address this inequality for our members by committing to top up the tax relief shortfall for those affected – and we remain the only Net Pay scheme to have done so. We are now calling directly on the Government to act to end this discrepancy and urge people to share and sign our petition.”

Paul Nowak, deputy general secretary, TUC said: “It’s not right that many low-paid workers – mostly women – are missing out on this pensions tax relief.

“The government needs to stop turning a blind eye and ensure all low earners get the same benefit – regardless of what type of scheme their employer chooses.”

What’s the difference between Net Pay and Relief at Source?
The vast majority of occupational pension schemes (and most public service pension schemes) operate on a Net Pay basis while traditionally, contract-based schemes have operated on a Relief at Source basis.

For savers in Net Pay schemes, pension contributions are deducted from pay before 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 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.

The differences in approach mean that savers in a Net Pay scheme who earn under £12,500 do not receive the 20% tax relief they would receive in a Relief at Source scheme.

Sign the petition
To sign the petition click here.

More information

Samantha Gould – NOW: Pensions
Email: pressoffice@nowpensions.com
Instinctif Partners
Email: nowpensions@instinctif.com
Fenella Cuthbert – Cicero/AMO
Tel: 0207 947 5327