Workplace pension provider NOW: Pensions has today confirmed that for the 2017/2018 and 2018/19 tax years it will again make up the income tax relief shortfall for members of its scheme who aren’t taxpayers (typically those earning less than £11,850) 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 still the only net pay scheme to offer a top up to its membership.
Troy Clutterbuck, CEO of NOW: Pensions said: “With no resolution to this growing issue in sight, we are once again putting our hands in our own pockets to address this inequality.
“With auto enrolment minimum contributions increasing, offering this top up will cost more than in previous years but we firmly believe it’s the right thing to do for our members.”
Clutterbuck continues: “We won’t allow this issue to be swept under the carpet and we will continue to press the Treasury to find a long-term solution. But, with so many competing priorities, this could be some way off.”
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, 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, £11,500 for the 2017/18 tax year and £11,850 for the 2018/19 tax year. This separation created a tax anomaly in that members with salaries between the two figures, who are more likely to be women, 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 £11,850, paying auto enrolment minimum contributions, the maximum they are missing out on in the current tax year is £38.91. But, as the nil rate tax band increases this will grow so that by 2020/21 when the nil rate tax band is expected to have risen to £12,500 savers could be missing out on up to £5.00 per month.
How does the top-up work?
- Information about how to claim the top up will be included within members’ 2017/18 and 2018/19 benefit statements and also communicated to employers so that they can contact their staff directly.
- Members who do not pay income tax on their earnings will be asked to complete a very short claim form on the NOW: Pensions website which includes authority for HMRC to divulge tax details to NOW: Pensions in respect of the 2017/18 and 2018/19 tax year.
- NOW: Pensions will then liaise with HMRC to confirm that these members have not paid income tax in the relevant tax year.
- Once confirmed, NOW: Pensions will credit members’ pension pots with the income tax relief they would have received in a relief at source arrangement.