Up to half a million lower paid workers could be at risk of missing out on tax relief on their workplace pension contributions, Royal London has reported.

Royal London’s estimate is based on a recent review document from the Department for Work and Pensions, Review of the automatic enrolment earnings trigger and qualifying earnings band for 2017/18, that shows for the first time, the number of workers who earn more than the earnings trigger for auto-enrolment, £10,000, but less than the income tax threshold £11,500.

Employees in this position in a workplace pension scheme that applies pension tax relief using the net pay arrangement system will not get tax relief. However, those whose scheme use the relief at source method will get tax relief.

The DWP noted: “the Government has also considered in particular the fact that around 280,000 workers earn between £10,000 and £11,500 would not benefit from tax relief on their contributions if enrolled into a pension scheme that uses a Net Pay Arrangement. Small and micro employers should ask their provider about the tax implications before making a decision on the scheme they choose.”

As the personal tax allowance is set to increase from £11,500 to a target level of £12,500 by 2020, Royal London predicts that this would mean up to half a million workers could lose out. This gap could worsen if the earnings trigger for auto-enrolment is cut below £10,000 to include more workers.

Royal London director of policy Steve Webb, said: “If a low-paid worker wants to put £100 into a pension, it will cost them £80 if they get standard rate tax relief, but the full £100 if they do not. This all depends on the lottery of whether their employer has chosen a scheme which offers tax relief at source rather than using the net pay arrangement.

“Firms and workers cannot be expected to know obscure facts like how tax relief is administered in different sorts of pension schemes. DWP and HMRC need to sort this issue out so that all low-paid workers get the help to which they are entitled with saving for a pension”.

Share Story: