Low earners to lose £78m over ‘nasty’ net pay anomaly

Over one million low earners are set to miss out on a combined tax top up of £78m a year, after increases in the personal allowance are set to exacerbate the “net pay anomaly” even further.

Research from Now Pensions found that 1.22 million people will miss out on £64 per year from April 2019, up from £34.91 in this tax year, after minimum contributions rise to 5 per cent and the personal allowance increases to £12,500.

Last month, the government was criticised for overlooking the “nasty anomaly”, which effects low earners who are in a net pay scheme, meaning the pension contribution is deducted before the tax is calculated.

Under a relief at source scheme, the pension contribution is deducted after the tax is calculated, at which point HMRC will send the basic rate relief (20 per cent) to the pension scheme.

Now Pension CEO, Troy Clutterbuck, said: “The increase in the personal allowance, combined with the rise of auto-enrolment minimum contributions will exacerbate this nasty anomaly in the tax system.

“It’s not right that some low earners are missing out on a government top up simply due to the type of pension scheme they are in and the government need to take urgent action to address this inequality.”

Clutterbuck added that Now Pensions will happily “put our hands in our pockets to make up the difference” and urged members to claim the tax relief back through a short form which can be found on their website.

According to Now Pensions, occupational schemes tend to operate on a net pay bases, while contract-based schemes traditionally operate at a RAS basis, while almost a third of schemes (31 per cent) don’t know which scheme they operate.

The firm’s research, of 691 senior business decision makers, found that 52 per cent operate a net pay scheme and 20 per cent RAS.

Last month the government was thought to be “looking at the opportunities” a digital tax system could bring to “tackle any differences” in the way pensions tax relief is paid.

However, just a couple of days later it rejected calls from the Treasury Committee to fundamentally reform pensions tax relief after it said there was “no clear consensus” to do so.

The government added that any changes to the regime could have "significant impacts for pension schemes, employers and individuals".

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