BUDGET 2018: Workers in pension tax relief ‘twilight zone’ could increase by 430,000

A pre-existing anomaly which causes some low paid workers to not get the same tax relief as others on the same wage has been made worse by the 2018 Budget, according to Royal London.

Its calculations estimate that the number of workers dragged into this “twilight zone” will increase by nearly half a million by next April.

Anyone earning more than £10,000 per year in 2018/19 has to be enrolled into a workplace pension, while the income tax threshold is £11,850.

Due to the recent Budget, the gap will increase by 35 per cent to £2,500 in 2019/20, which could add around 430,000 extra workers to those affected.

Royal London director of policy, Steve Webb commented: “It is absurd that whether or not a low paid worker gets tax relief depends on the lottery of how their pension scheme delivers tax relief.

“This is a kind of pensions ‘twilight zone’ where two workers on the same wage and living next door to each other can be in different positions when it comes to tax relief, and the chancellor has put another half a million workers into that position.”

Workers in this income bracket have to be enrolled into a pension but do not pay income tax, although some of them can still benefit from tax relief on their pension contributions.

If their employer chose a plan where tax relief is provided through the ‘relief at source method’, such as a group personal pension, those employees will get full basic tax relief on their pension contributions.

However, if the pension scheme uses a ‘net pay arrangement’, those workers will not receive tax relief.

HMRC has estimated that in 2015/16 there were around 1.22m workers earning below the tax threshold but contributing to a pension under the ‘net pay arrangement’ where they get no tax relief.

This number is likely to have grown significantly since 2015/16 because of the further roll out of automatic enrolment and because of the increases in the tax threshold since 2015/16.

Webb added: “It is time for the government to address this issue as a matter of urgency”.

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