Budget 2018 representation: Net Pay Arrangements for lower paid workers
In our Budget 2018 representation, we tell the Government that the type of scheme pension savers are in should not affect the tax relief they receive and put forward a practical and feasible solution as to how the net pay ‘problem’ can be overcome. It would require a clause in the Finance Bill and some easily implementable system changes at HMRC. We urge the Government look at this issue as soon as possible to rectify the unfairness that currently exists and to prevent the success of auto enrolment being undermined.
Automatic enrolment is widely regarded as a policy success story.
But, while the government incentivises pension saving through tax relief, a huge number of low earners are missing out on tax relief on their pension contributions through no fault of their own.
The issue arises because non-taxpayers in net pay pension arrangements are not entitled to 20% tax relief, while non-taxpayers in relief at source pension arrangements are. This essentially makes auto enrolment 20% more expensive for non-taxpayers in net pay arrangements.
Somebody earning £11,850, making a 3% contribution, is missing out on £34.91 in 2018/19 as compared to somebody in a relief at source scheme. As the personal allowance and contribution rate are set to increase, this problem will grow.
September 2019 update: A summary paper outlining LITRG’s solution to the net pay pensions issue has been discussed and agreed by members of the pensions industry and other interested parties. This shortened version can be found here: Pensions net pay arrangements: giving tax relief to lower paid workers – summary document
May 2019 update: Since the time of the last Budget, LITRG has been working with members of the pensions industry and other interested parties to explore and develop this proposal further. Our updated briefing document can be found here: LITRG briefing – Net Pay Arrangements for lower paid workers, updated May 2019