NOW: Pensions CEO Troy Clutterbuck has signed a letter to Chancellor Philip Hammond, which aims to address the pay anomaly in the forthcoming Budget, and highlighted that “more than a million low earners are missing out on tax relief” on pension contributions.
The letter acknowledged that auto-enrolment (AE) is a “policy success story”, which has seen nearly 10 million people saving into a workplace pension because of its introduction. However, it argued that a tremendous number of workers are missing out on the tax relief benefit “through no fault of their own”.
Those who signed the letter, including Royal London director of policy Steve Webb and Trades Union Congress deputy general secretary Paul Nowak believe in two principles; the means by which tax relief is paid should not affect the amount of tax relief paid, and savers should receive this tax relief automatically without having to request it from HMRC.
There are currently two ways in which pension savers can receive tax relief – through either ‘net pay’ or ‘relief at source’ (RAS) arrangements.
The letter explained that: “Members of RAS pension schemes who do not pay income tax, typically those earning less than £11,850 each year, 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. This means that the lowest earners in net pay schemes are having to pay 25% more for their pensions (by missing out on 20p for every £1 contributed, they need to pay 25% more to achieve parity).
“Many are unaware of this, but we urge you to address the situation urgently for these low-paid workers who can least afford the added cost.”
Figures from HM Revenue & Customs (HMRC) identified that in 2015/16, 1.22 million people have been affected by this issue, including those workers that were automatically enrolled.
As a result of this issue, somebody earning £11,850, paying AE minimum contributions, is missing out on £34.91 in the current tax year. When the personal allowance is expected to have risen to £12,500, and the minimum contribution rate to 5%, by 2020/21, affected savers could potentially miss out on almost £65 per year.
“To prevent AE being undermined, it is essential that the government takes decisive action based on the two principles above. This needs a clause in the Finance Bill and utilisation of the system changes that are already underway in HMRC to tackle the devolution problem,” the letter concluded.
The full list of signatories are: Age UK charity director Caroline Abrahams, pensionsync chair Ros Altmann, TISA director general David Dalton-Brown, Chartered Institute of Taxation low incomes tax reform group chair Anne Fairpo, NOW: Pensions CEO Troy Clutterbuck, CIPP associate director of policy Helen Hargreaves, TUC deputy general secretary Paul Nowak, PLSA director of policy and research Nigel Peaple, Pension Playpen and First Actuarial Henry Tapper and Royal London director of policy Steve Webb.
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