The recent announcement in a House of Lords debate that the government will “examine the process for payment of pensions tax relief for individuals” has once again ignited interest in the issue of tax relief for pension saving, although it is fair to say that it has never gone too far away.
The announcement came in a debate around automatic enrolment, and specifically references the distinction between the two different methods by which the current systems operate. So it seems as if the emphasis will be on trying to reconcile the differences between the “relief at source” and “net pay” methods, each of which has its drawbacks.
Relief at source automatically gives everybody relief on contributions at the basic rate of tax, so individuals who are below the income tax personal allowance get tax relief as well – as they are entitled to do.
Net pay arrangements take account of pension contributions when initially calculating income tax, so higher-rate taxpayers automatically get higher-rate tax relief. But under this method those who do not pay income tax – for example, those automatically enrolled but earning less than £11,850 so not paying tax – do not automatically get tax relief.
Neither system works perfectly. Under relief at source, higher-rate taxpayers need to claim any higher-rate tax relief they are entitled to. Under net pay, non-taxpayers need to claim basic rate tax relief. It is not clear how many people fail to do this.
An opportunity to find a way to make sure everyone gets the tax relief they are entitled to has to be welcomed.