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Published on 20 July 2022

A further – slow – step towards resolving pensions injustice for low-earners

Press release

The Low Incomes Tax Reform Group (LITRG) gives a cautious welcome to today’s publication of draft legislation1 aiming to address the issue of an estimated more than one million low-income workers (mostly women) not receiving a government incentive to save into their workplace pensions. The government’s intended scheme to give equivalent payments to those missing out on tax relief will enable those affected to claim an average estimated rebate of £53 a year.2

Press release. A coloured image of a speakerphone, a paper press release and microphone.

Today’s publication of draft legislation aims to put an end to a longstanding inequality in pensions tax relief, on which LITRG has been campaigning since 2018. The issue arises because workers contributing to net pay arrangement workplace pensions do not get tax relief on some or all of their pension contributions if they do not earn enough. By contrast, if their employer chooses to operate a relief at source (RAS) scheme, the worker obtains tax relief via a separate mechanism, even if they are a non-taxpayer.3 

Kelly Sizer, Senior Technical Manager for LITRG said:

“This is another step closer to resolving a significant pension injustice affecting more than a million low-income workers.

“While this further progress towards levelling up the government’s contribution towards pensions savings for low-income workers is welcome, it remains unfortunate that HMRC will only be implementing payments to those affected from 2025/26 – backdated by one year to 2024/25. Given that this issue has been known about for many years, and the numbers affected have been steadily increasing4, we would have liked to have seen further backdating to at least the 2021/22 tax year when the proposed solution was announced.

“We will be carefully scrutinising the details to see exactly how the government intends their proposal to work and that there are no unintended consequences as a result of the way the draft legislation is worded.

“We will also be urging HMRC to consult closely on the practicalities of implementation. For example, it is feared that if people have to claim the payments, they may not do so and as a result will miss out. We therefore cautiously welcome the suggestion in the draft legislation that the primary onus will be on HMRC to make the payments to affected individuals.5

Notes for editors

  1. See HM Treasury press release 20 July 2022, ‘1.2 million low earners to see boost in take home pay’ and draft legislation
  2. See Pensions tax relief administration: Call for evidence response, October 2021
  3. For example:
    Jade works part time, earning £12,400 a year. Her employer’s net pay pension scheme requires her to pay a 5% gross pension contribution on earnings above the lower earnings limit (£6,396 for 2022/23).
    She therefore pays (£12,400 - £6,396) x 5% to her employer’s net pay scheme = £300.To a relief at source scheme, she would have paid 4% (£240) with the balance being made up through tax relief paid by HMRC direct to the scheme.
    This would not be clawed back even though she is a non-taxpayer.Jade has therefore paid a £60 ‘penalty’ for contributing to a net pay arrangement scheme.
  4. Since the personal allowance first exceeded the £10,000 auto-enrolment threshold in 2015/16, the number of non-taxpayers contributing to workplace pensions have been increasing. The personal allowance is now £12,570.
  5. Much depends on how the wording of the draft legislation is interpreted by HMRC. It says that HMRC ‘must make arrangements to secure that, so far as reasonably practicable, they pay to the individual the appropriate amount…’.
    Today’s press release indicates that HMRC will write to individuals eligible for a payment. The individual will then need to supply bank details and HMRC will then automate the payments via bank transfer, paying them in future years without the need for a further claim.

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.

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