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Published on 14 September 2022

Draft legislation Finance Bill 2022/23: pensions relief relating to net pay arrangements

LITRG have responded to HMRC’s draft legislation on the low earners anomaly: pensions relief relating to net pay arrangements. While we are cautiously optimistic about the new rules, the draft legislation does give rise to various concerns.

LITRG Response: Draft legislation Finance Bill 2022 / 23: Pensions relief relating to net pay arrangements. Illustration of two older people holding hands, with the man using a walking stick.

While we cautiously welcomed the publication of this draft legislation in July, we believe that the government’s proposal to treat these compensatory payments made by HMRC as employed earnings for income tax purposes could cause potential complexities. We therefore recommend that any top-up payments should be treated as tax refunds rather than earnings. It is our understanding that either way the payments would have mostly the same effect on universal credit claimants. However, we would recommend that HMRC and DWP look together at our concerns that the wording of the UC Regulations arguably does not match DWP’s current practice in terms of deducting pension contributions from universal credit claimants’ income. Additionally, we believe it is important that HMRC and DWP share top-up payment information so that universal credit claims are adjusted accordingly without input from the claimants themselves.

If top-up payments are made to individuals who have already a tax return prior to receiving the payment in the following tax year, their Self Assessment tax return would need to be amended. We recommend that HMRC take this into account when designing their processes around the payments.

We recommend that an ability to claim the relief is built into the legislation, together with an explicit right of appeal if HMRC fail to make a payment where the individual believes one to be due.

We have again urged HMRC to backdate top-up payments to compensate pension savers for previous financial losses or further losses between now and introduction of top-up payments from April 2024.

The consultation can be found here.

Our full response can be found here.

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