An end in sight to 1.7 million low-income workers’ pensions inequality?

Many pension schemes provide the government-funded savings incentives (generally thought of as tax relief) through a system called relief at source (RAS), enabling lower earners to get the taxpayer-funded contribution to their pension automatically. But other pension providers add this money through a net-pay arrangement, which works well for most people, but not for those who earn less than the £12,500 threshold for paying income tax. These people miss out on the taxpayer-funded contribution to their pensions they would otherwise be entitled to and they end up paying it themselves.

Victoria Todd, Head of LITRG, said of today’s announcement to review this issue:

“This pensions inequality for low-income workers, some three-quarters of whom are women, threatens to damage public confidence in auto-enrolment, widen the gender pensions gap, and let down those who need to increase their retirement savings most.

“Today’s announcement that the Government will shortly publish a call for evidence to review the issue is therefore a welcome first step.

“Our proposed fix to the problem is that HMRC use data they already have, collected via the PAYE ‘real-time information’ system, to identify those taxpayers affected and make a payment to them equivalent to the tax relief they would have received in a relief at source scheme.³

“While no solution is likely to be entirely straightforward, we believe this to be the most pragmatic way to equalise the cost of pension contributions for all. We stand ready to contribute to the review and work with officials with a view to resolving this issue swiftly.”  

Kelly Sizer

Notes

1. Full Budget 2020 document, para 2.182:
   “2.182 Call for evidence on pension tax administration – Those earning around or below the level of the personal allowance and saving into a pension may benefit from a top-up on their pension savings equivalent to the basic rate of tax, even if they pay no tax. Whether they receive this top-up depends on how their pension scheme administers tax relief. The government has committed to reviewing options for addressing these differences and will shortly publish a call for evidence on pensions tax relief administration.”
2. The 2019 General Election Conservative manifesto stated: “A number of workers, disproportionately women, who earn between £10,000 and £12,500 have been missing out on pension benefits because of a loophole affecting people with net pay pension schemes. We will conduct a comprehensive review to look at how to fix this issue.” For the full text please click here (p16)
3. The full text of LITRG’s proposed solution to this problem can be found at https://www.litrg.org.uk/latest-news/submissions/200204-budget-representation-2020-net-pay-action-group