Pension industry members back HMRC P800 net pay anomaly solution

Pension industry organisations have come out in support of the HMRC P800 solution in response to the government's consultation on pensions tax relief administration, emphasising the need to protect existing tax benefits.

The consultation, which closed this week, sought to gather views on the operation of the main methods of administering pensions tax relief, net pay and relief at source (RAS).

In their responses, industry experts stressed the need for a specific focus on the net pay anomaly issue, as well as the need to protect existing tax incentives.

Now Pensions director of policy, Adrian Boulding, highlighted the impact of the net pay anomaly on savers, which has seen the lowest earners in net pay schemes are missing out on up to £64 a year.

He stated: “This isn’t just a quirk of the tax system but something that affects working people’s living standards.

"Until a long-term solution is found, we offer to top up the pension pots of non-income tax paying members and are the only scheme to do so.

“While some may argue that non-taxpayers shouldn’t receive tax relief, in the majority of cases those not paying tax are part-time workers. 75 per cent of these part-timers are women juggling their career with caring duties.”

Boulding expressed support for a ‘P800 solution’, which would use the existing HMRC internal P800 form, utilising HMRC Pay As You Earn (PAYE) real time information (RTI) data to identify those making pension contributions under net pay arrangements.

He explained: “HMRC would then provide the appropriate tax relief to non-income taxpayers through an annual reconciliation process via the P800 process.

"HMRC would review an individual’s total income, the amounts of pension contributions paid and the amount of tax-free allowances due, enabling them to identify the amount of unrelieved pension contribution and then apply a 20 per cent tax refund.”

The Investing and Saving Alliance (Tisa) head of retirement, Renny Biggins, also agreed that the main focus for this consultation should be to resolve the net pay anomaly, clarifying however, that care must also be taken to avoid an adverse impact on those who do currently receive relief, either through net pay or RAS.

He stated: “Any change to the administration of tax relief could have detrimental impacts on members and create significant challenges for the industry, which in turn could flow through to worse outcomes for scheme members.

“Industry and government have worked hard to boost consumer confidence in pensions so any change to the administration of tax relief which harms member outcomes, such as the removal of tax relief to lower earners in RAS, would undo much of the good work that has been undertaken."

Considering this, Tisa has also identified the HMRC P800 proposal as the "most appropriate solution".

Biggins continued: “As agreed by the Net Pay Action Group, this is the most effective option and means minimal or no impact to members, employers and industry, other than making pension saving fairer for all.

“The fundamental principles also align to the government 10-year tax administration strategy.”

Aegon head of pensions, Kate Smith, echoed this, arguing that the solution must be around “levelling up, not down”, stressing that one option of removing tax relief for all low earners is “completely unpalatable”.

She stated: “All of the solutions put forward come with challenges and increased costs, with no easy solution. But it’s essential that all those currently losing out do receive their government top-up.

“Lower earners saving in schemes using relief at source currently benefit from the 20 per cent tax top-up.

"Removing this will mean lower take-home pay for this group and could lead to a higher opt-out rate, with the loss of employer pension contributions impacting their financial futures."

Smith identified using HMRC RTI data to pay low earners saving in net pay schemes a bonus using RTI data, without requiring this group to make a claim, as the only "systematic way" to resolve the net pay anomaly.

“This is the most workable, least disruptive solution for these low-earners and their employers," she stressed.

Smith also explained that a similar RTI solution could also be used to provide an automatic correction for schemes using relief at source, noting that the potential for economies of scale makes RTI adjustments "more cost-effective, viable" and benefits more savers.

The Pensions and Lifetime Savings Association (PLSA) has also supported this approach, with PLSA director of policy and research, Nigel Peaple, noting that approximately 1.5 million lower earners in net pay schemes are missing out on pensions tax relief.

He continued: “The PLSA has consistently called for a central fix to HMRC’s processes (known as the P800 solution), which would ensure that every saver receives a government contribution to their pension savings.

“The inequity of the existing system, which disproportionately impacts low earners and women, has gone on for too long and must be fixed if all savers are to get the most out of their retirement savings.”

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