‘Not possible’ to resolve AE tax relief issue for low earners, govt says

The government has said it is “not possible” to resolve an auto-enrolment tax issue that sees low earners miss out on tax relief and face paying more than 20 per cent extra for their pension.

The issue affects those who earn over the £10,000 needed to trigger auto-enrolment but below the £11,000 income tax threshold, who are enrolled in a net-pay pension scheme rather than a relief at source scheme.

For those earning over the income-tax threshold, the same amount of tax relief is given regardless of the type of scheme. However, due to the way the contributions are deducted in net-pay schemes, those earning below the threshold do not receive the relief.

In a net-pay scheme, contributions are deducted from pay before any tax is applied, whereas with a relief at source scheme, the employee receives basic rate tax relief at source when they pay their net pension contribution.

The government backed pension provider Nest uses a relief at source scheme, as does The People’s Pension, however, NOW: Pensions uses a net-pay arrangement. As a general rule of thumb, group personal pension tend to be relief at source and mastertrust schemes net-pay arrangements.

It has been previously speculated that around 900,000 people are affected by the issue. However, former Pensions Minister Ros Altmann has asked the government what analysis they have undertaken to identify how many employees are saving into a workplace pension which denies them tax relief. She also asked what the effect will be on low earners in a net-pay scheme and what assessment the government has made of the challenges faced by low earners who do not receive tax-relief.

On behalf of the Treasury Baroness Neville-Rolfe answered: “The government appreciates the impacts on low paid workers whose employers use a net pay arrangement pension scheme. However, it has not been possible to identify any straightforward or proportionate means to align the effects of the net pay and relief at source mechanisms more closely for this population.”

Although there is no clear estimate of how many are affected, First Actuarial business development director Henry Tapper noted that with the current review of auto-enrolment, which is looking to bring in more lower paid earners, the number of those caught in the net-pay trap could increase.

He said that whether there will be a change to the policy is down to how seriously people take the issue: “The problem for the people who are affected is they are not very ‘important’ either in a financial or political sense, and they have no voice of their own. That is not a good reason for them to be ignored. The government should be aware that ignoring classes of the population can lead to problems like WASPI. We would urge the DWP to push a little harder.”

Furthermore, Altmann also asked what plans the government has to ensure employers and workers are told that the net pay arrangement may be unsuitable for workers who earn below the personal tax threshold, and that they face paying more than 20 per cent extra for their pension than if they were in a relief at source scheme.

In addition, she asked what contact the government has had with The Penisons Regulator during the past six months to ensure that the regulator and the MasterTrust Assurance Framework take all necessary steps to ensure that workers earning below the personal tax threshold, and their employers, who are paying into net pay pension schemes under the auto-enrolment rules, are not disadvantaged by the loss of tax relief, and are properly informed of the personal impact of those schemes.

To these, Neville-Rolfe stated the government has regular discussions with the regulator on a range of issues, including workplace pensions. “Workplace pension schemes are chosen by employers and The Pensions Regulator provides guidance on this in relation to automatic enrolment. The guidance covers the choice between net pay and relief at source schemes, and the implications of net pay schemes for employees who do not pay tax. It also points out that some schemes that use the net pay arrangement may have lower charges than schemes that operate relief at source.

“All employers, including public sector employers, are expected to follow TPR’s guidance about providing their employees with relevant information on the arrangements for tax relief.”

On the answers given, Altmann said: "These answers do not respond to my questions at all and are really disappointing. There is no sign of any concern for these low paid workers who surely need all the help they can get to build up better pensions. At the very least the Treasury should allow the scheme to claim back relief for the low paid."

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