Govt to introduce net-pay top-up system from 2024-25

The government has announced plans to introduce a top-up system for low earners in net-pay arrangements from 2024-25 in an effort to “broadly equalise outcomes for all lower earning pension savers”.

Under the proposed system, top-up payments will be made in respect of contributions made in 2024-25 onwards directly to low-earning individuals saving in a pension scheme using a net-pay arrangement.

This, in turn, is expected to better align outcomes with equivalent savers saving into pension schemes using relief at source, with an estimated 1.2 million individuals, 75 per cent of whom are women, standing to benefit by an average of £53 a year.

The government also confirmed that it will invest £71m in modernising the administration of pensions tax relief and to address the McCloud remedy.

The government has been unable to provide a static cost for the plans as this will depend on take-up, although it has estimated a cost of £10m in 2025-26 and £15m in 2026-27.

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

The Conservative government had also committed to a review of the anomaly in its election manifesto in 2019, with a call for evidence into pension tax relief administration later launched by HM Treasury in July 2020.

According to HM Treasury's response to its call for evidence on pension tax relief administration, an alternative method of identifying low earning savers in net-pay arrangements has been identified since the call for evidence closed, however.

This involves making changes to the PAYE reconciliation process, outside of the P800 process, and will require significant HMRC IT system changes to allow HMRC to process millions of additional records each year.

The necessary changes are expected to be in place to top-up low earners in NPA schemes in respect of contributions made in 2024-25.

HMT confirmed, however, that in order to minimise the risk that HMRC would have to reclaim the payments if recipients later declared additional income, the first payments will be made after the end of the 2024-25 tax year, in 2025-26.

Primary legislation will also be required, with the government expecting to publish draft legislation at L-Day 2022 to be legislated for in a subsequent Finance Bill.

In HM Treasury’s response to the call for evidence, Economic Secretary, John Glenn, said: “While the main methods of giving pensions tax relief deliver the same outcomes for most people, they don’t for some individuals.

“Lower earners – those with taxable incomes below the personal allowance – saving in a pension may find themselves in differing financial positions depending on how their pension is administered.

“Those affected by this anomaly include some individuals earning over £10,000 who have been automatically enrolled into a workplace pension

“After considering all the responses carefully, we have identified a solution to broadly equalise outcomes for all lower earning pension savers.

“As a result of this change, all lower earning pension savers should receive similar outcomes, regardless of how their pension scheme is being administered for tax purposes."

However, LCP partner, Steve Webb, has warned that the proposals are "messy, belated, and may well be ineffective" in addressing the net-pay anomaly.

He stated: "The proposed fix for low-paid workers is messy, belated and may well be ineffective.

"The problem of low-paid workers missing out on tax relief has been going on for a decade and will still go unfixed for another three years. And if it relies on people claiming these top-ups there is a real risk of non take-up.

"This is yet another sticking plaster response to a problem with the pension tax relief system which needs a systematic overhaul”.

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