NOW: Pensions has confirmed its plan to make up the income tax relief shortfall for members of its scheme that aren’t tax payers.

For the second year in a row, the pension provider has decided to top up the pension savings of its members who aren’t currently receiving income tax relief due to not being a taxpayer, typically those earning less than £11,000.

Changes in the last few years have resulted in the net pay anomaly. This involves changes to the nil rate tax band; until 2015, both the nil rate tax band and the auto-enrolment earnings threshold were £10,000 pa, meaning that employees eligible for auto-enrolment were also income taxpayers. As a result, these employees received tax relief regardless of the method of contribution their pension administrator utilised.

However, from April 2015, while the auto-enrolment earnings threshold remained at £10,000. The nil rate tax band was uprated to £10,600 and then rose to £11,000 for the 2016/17 tax year. Resultantly, this created a tax anomaly as members with salaries between the two figures are left disadvantaged under the net pay arrangements.

Non-taxpayers who are members of a pension scheme are permitted to basic rate tax relief (20 per cent) on pension contributions up to £2,800 a year. For example, HMRC would top up a net contribution of £2,800 to a gross £3,600. Nonetheless, only members of pension shcemes that operate a relief at source arrangement can receive this tax relief.

In order to top up non-taxpayers’ savings, therefore, NOW: Pensions will include information regarding the anomaly in members’ 2016/17 benefit statements and communicate the issue to employers. Affected members will be directed to a short claim form on the providers’ website and a letter of authority allowing HMRC to share tax details to NOW: Pensions. Once NOW: Pensions has confirmed with HMRC that these members do not pay tax, the provider will credit members’ pension pots with the income tax relief they would have received in a relief at source arrangement.

The majority of occupational and trust based schemes operate on a net pay basis, but NOW: Pensions is the only net pay scheme to offer a top up to its members.

NOW: Pensions interim CEO Troy Clutterbuck said: “Net pay offers savers a number of benefits but, through no fault of their own, non taxpayers continue to miss out on the government top up they would receive in a relief at source scheme.”

“While the amounts these savers are currently missing out on is relatively small, around £10 per year for somebody earning £11,000 – as the nil rate tax band rises this amount is going to increase. We continue to talk to the Treasury and HMRC to find a way to resolve this anomaly over the long term but progress has been disappointingly slow and a solution to this problem remains elusive.”

Responding to NOW: Pensions’ announcement, former Pensions Minister Baroness Ros Altmann said: “This scandal has been going on for a long time, but the government has failed to address it. It is good to see one company taking the moral high ground. Now:Pensions is a net pay scheme, but it has chosen to give the extra money to its low earning customers from its own pocket. None of the other net pay schemes has been willing to ensure low earners do not lose out.

“Ideally, the Treasury needs to allow low earners to claim the tax relief they are entitled to. As auto-enrolment pension contributions are set to quadruple by 2019, the amount of money these low earners lose out on will increase sharply and more women will be denied the government help they should have. This scandal needs to be urgently addressed and I hope the Treasury will take the matter more seriously as most of these low earners will be women, who are far more at risk of inadequate pensions than men.”

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