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Press release: Disappointment at government inaction on pension tax anomaly affecting 1.5 million low-income workers
The Low Incomes Tax Reform Group (LITRG) is disappointed at a lack of progress towards rectifying an inequality which sees an estimated 1.5 million or more low-income workers paying a 25 per cent penalty for their pension savings. This issue can cost those affected (three-quarters of whom are women) around £65 a year due to the way their employers’ pensions schemes operate.
The Government today published its responses to a number of tax consultations but not to its call for evidence on ‘pensions tax administration’, which covers this issue. This is despite the call for evidence being concluded longer ago than a number of the consultations on which it has responded.
Many pension schemes provide a government-funded savings incentive (in the form of tax relief) through a system called relief at source, enabling lower earners to get a taxpayer-funded contribution to their pension automatically.
But other pension providers add this money through a net-pay arrangement. This works well for most people, but not for those who earn less than the £12,570 threshold for paying income tax. These people miss out on the taxpayer-funded contribution to their pensions they would otherwise be entitled to and end up paying it themselves.
Kelly Sizer, Senior Technical Manager at LITRG, said:
“The cost of this pensions inequality for affected low-income workers can amount to the price of a weekly shop each year. This is an unacceptable penalty to pay for the same pension savings as their counterparts for whom their employer has chosen to use a relief at source scheme.
“Given this issue has been known about for several years, the cumulative cost is mounting and continues to do so the longer the Government delays in implementing a solution.
“It is therefore disappointing that the Government has not taken the opportunity presented by today’s tax ‘Legislation day’ to respond to the call for evidence it published a year ago1 following its manifesto commitment on the issue.2
“While no solution is likely to be entirely straightforward, LITRG believes that we have found a pragmatic way to equalise the cost of pension contributions for all. Our proposed fix 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 there have understandably been other priorities over the last 18 months, we now urge the Government to take action to deal with this injustice as soon as possible.”
Notes for editors
1. Call for evidence on pensions tax relief administration, published 21 July 2020 – see here, with LITRG’s response here.
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
4. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk