An anomaly that has excluded more than a million low-paid workers in net-pay arrangements from the tax relief available on relief-at-source schemes is to be rectified, the government has confirmed.
Since 2015, people saving through a net pay arrangement (NPA) have had less take home pay compared to similar earning savers who use a relief-at-source scheme. This is because those using the latter type of pension scheme receive a 20 per cent top-up from the government on their savings, while those below the income tax threshold using NPAs receive tax relief at their marginal rate of 0 per cent.
The government says the change will benefit 1.2 million people, with 200,000 set to see a £100 increase in their take-home pay. The average beneficiary will receive an extra £53 a year.
The move follows an extensive campaign by Baroness Ros Altmann.
Financial Secretary to the Treasury Lucy Frazer says 75 per cent of those to benefit are women, whilst 11 per cent are based in the North-West and Merseyside and 12 per cent are in London.
Beneficiaries will receive their top-ups directly into their bank accounts from 2025 and HMRC will be notifying those who are eligible then. The government has pledged to deliver these changes in full and on time and will ensure the complex nature of these IT changes are ready to deliver this wide-impacting change.
The announcement comes as a number of documents are published by the government today, including draft legislation for the Finance Bill 2022-23 for technical consultation.
Frazer says: “A quirk in our pensions tax system has meant that over a million low-earners have lost out on government top-ups to their pensions, resulting in comparatively less take home pay.
“We are correcting this injustice so low earners will get the same level of government support, no matter what type of pension they use.”
Quilter head of retirement policy Jon Greer says: “After many years of outcry from the industry, the government finally committed to addressing the inherent inequality for low earners in pension net pay schemes versus relief at source schemes. Today, the government has published legislation confirming that it is still set to go ahead with the changes although there has been no shift of the time frame and the longstanding dithering has resulted in 1.2 million workers needing to wait until the 2025/26 tax year to see change. What’s more, the relief will only applied to contributions made from 2024/25, meaning low earners will have forgone millions in pensions tax relief due to years of the government sitting on their hands.
“The Conservative party manifesto recognised the problem and pledged to solve the issue all the way back in November 2019. By the time it is eventually fixed, hundreds of millions will have been lost in pension funds by 1.2m lower earners, three quarters of whom are women.
“The net-pay tax flaw means some workers earning £12,570 a year or less could retire with a pot worth thousands of pounds less than others. This is because people enter into a perverse lottery where those who are in a net-pay pension scheme don’t benefit from government tax relief into their pension pots, while other workers who are in a ‘relief at source’ scheme receive the top up.
“While it is laudable that the government is actually tackling the problem, its solution remains imperfect, but at least better than the current situation, as it commits to paying a top-up contribution directly to the person’s bank account. However, this ultimately means they will lose out on potential growth by not having the money held in the pension fund and invested.
“This solution also creates a risk of delay between the pension contribution being made and receiving the top-up. It’s been a long road to get to this point, and there are still some miles to go before this quirk in the pension tax system is finally addressed.”
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