Govt launches pensions tax relief administration call for evidence

The government has launched a call for evidence into pensions tax relief administration, following industry and stakeholder concerns over the net pay anomaly.

It has highlighted concerns around the potential for a low-earning individual’s take-home pay to be affected by the method of pensions tax relief operated by their scheme, stating that it is keen to understand what “deliverable options for change” exist, as a "straightforward and proportionate solution" has yet to be outlined.

The call for evidence seeks to gather views on the operation of both the main methods of administering pensions tax relief, net pay and relief at source (RAS), and what improvements might be made, closing to responses on 13 October.

The government clarified that it is not proposing to implement an entirely novel method of administering pensions tax relief, but rather is looking to understand any potential new approaches to providing pensions tax relief within the current framework.

The call for evidence stated that the government is approaching the proposals with “an open mind”, although all approaches will be compared to the principles for making changes to the pensions tax relief administration system: simplicity, deliverability and proportionality.

Industry experts have previously raised concerns over the impact of the anomaly on members and the current tax relief system, with Now Pensions previously estimating that around 1.75 million earners are missing out on up to £111m of pensions tax relief.

The Conservative government previously committed to a review of the anomaly in its election manifesto last year, more recently stating the timelines for this had been impacted by the ongoing Covid-19 pandemic.

The report emphasised the importance of balancing consistency in outcomes and simplicity for individuals, with the options outlined within the call for evidence report all having drawbacks that could “introduce significant complexity” into the pensions tax regime.

The government has outlined four alternative approaches, again clarifying that any changes would be difficult to explain to individuals and are likely to lead to greater engagement with HMRC by individuals who would otherwise have no need to contact them.

Commenting in the foreword of the call for evidence, Economic Secretary to the Treasury, John Glen, stated: “Any change could create challenges elsewhere, either for pension schemes, their members or the wider personal tax regime.

“To date, a straightforward and proportionate solution has not been identified.

“This call for evidence, therefore, presents the options we have considered and seeks views on our assessment of them and their impacts."

The call for evidence stipulated that “for the majority of savers” the method of tax relief makes no difference to the relief they are entitled to, highlighting those whose marginal rate of income tax is below the basic rate as the “exception” to this rule.

It stated that the discrepancy arises from RAS being a simplification for both pension scheme administrators and scheme members, as members do not have to provide documentation to their pension scheme about their tax affairs to ensure the correct marginal rate relief can be given.

The first suggestion outlined in the document is to pay a bonus to lower-earning pension contributors whose employers use the net pay method, putting them in the same position as those who are members of RAS pension schemes.

HMRC would be able to use RTI data to undertake this, however the government clarified that this could introduce additional complexity for members, pension schemes and HMRC.

It would also require a sizeable time lag between the pension contribution and the bonus being received, with savers, employers, pensions schemes and HMRC all likely to face “significant and costly” administrative changes.

A stand-alone charge to recover the top-up given under the RAS method of tax relief where tax is not paid was also suggested, to reflect that the anomaly only arises for taxpayers who are members of RAS scheme and whose highest marginal income rate is below the UK basic rate.

However, the government emphasised that this approach would mean taking money from those on lower incomes working to save for their retirement, as well as increasing the administrative burden on employers and RAS scheme administrators.

Furthermore, in isolation, it would not equalise outcomes as an RAS saver would still have a lower personal allowance than a member of a net pay scheme.

Having employers operate multiple schemes, one net pay and one RAS, was also outlined as a potential approach, with employee contributions switched between schemes depending on whether their earnings would take them over the personal allowance for that pay period.

This method would enable low-earning employees to benefit from the top up that RAS provides for those periods where their pay would take them below the personal allowance, but allows higher earners to automatically receive the full tax relief on contributions in their net pay arrangement.

The government said that this would require minimal tax legislative changes, acknowledging however that administrative requirements of this solution are likely to make it feasible only for large employers with a relatively high proportion of low-earning employees.

It stated that it was not convinced that this would fully resolve the potential for different outcomes, or of the case to mandate this approach for all employers, noting however, that employers could voluntarily adopt a similar approach.

Mandating the use of RAS for all defined contribution (DC) pension schemes was suggested as a fourth approach within the call for evidence, as this would ensure all low earners receive the top-up on their pension savings.

The government noted that this proposal could apply to all employers with low-earning employees, all new DC schemes, or simply all DC schemes more broadly.

It stated that it understands that requiring all DC schemes to transfer to RAS would be a “significant change” and could require system changes, adding however, that it does have the “strong attraction” of introducing a single method of tax relief for some or all DC savers.

The report acknowledged that this approach would also introduce additional burdens on those with a marginal rate of tax above the basic rate, calling for evidence on the impact of the proposal, and how any negative impact could be mitigated.

The call for evidence also welcomes submissions on any alternative approaches not outlined in the document, as well as on any proposals which could more broadly improve the administration of RAS schemes, which stakeholders have highlighted as more costly.

Furthermore, beyond the specific issues associated with the net pay anomaly, the consultation recognises the broader complexities associated with pensions and tax relief, welcoming views on whether any of the administrative processes unnecessarily complicate wider understanding of pensions tax relief.

It also highlights issues under the current system stemming from different tax rates and thresholds across the UK, such as in Scotland.

The pensions industry has broadly welcomed the call for evidence, which also follows calls for a consultation from MPs, with Smart Pension director of policy, Darren Philp, describing the consultation as a “positive step” to addressing the issue and creating “fairness across the board”.

However, concerns have persisted amongst experts, with Canada Life technical director, Andrew Tully, stating that “it’s crucial that any changes are made with simplicity in mind”, whilst Quilter head of retirement policy, Jon Greer, emphasised the importance of “clear and achievable timelines” to ensure that the issue “does not continue to drag along unnecessarily”.

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