Up to half a million low-paid workers at risk of missing out on tax relief

Up to half a million low paid workers will soon be at risk of missing out on tax relief on their workplace pension contributions according to a Royal London estimate. The figures are based on a Government document which reveals for the first time the number of workers who earn more than the earnings trigger for automatic enrolment (£10,000) but less than the income tax threshold (£11,500 in 2017/18).   If these workers are part of a workplace pension scheme that applies pension tax relief using the ‘net pay arrangement’ system, they will not get tax relief because they are under the tax threshold.  By contrast, those whose schemes use the ‘relief at source’ method do get tax relief.  The Department for Work & Pensions says:

“…the Government has also considered in particular the fact that around 280,000 workers earn between £10,000 and £11,500 would not benefit from tax relief on their contributions if enrolled into a pension scheme that uses a Net Pay Arrangement. Small and micro employers should ask their provider about the tax implications before making a decision on the scheme they choose”.

(Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/576423/review-of-ae-earnings-trigger-2017-2018.pdf )

This problem will get worse as the personal tax allowance is increased from £11,500 in 2017/18 to its target level of £12,500 by 2020.   Royal London estimates that this would mean that up to half a million workers could be caught in this trap. The gap would get even wider if, as some have argued, the earnings trigger for automatic enrolment should be cut below £10,000 to include more workers.

Commenting, Steve Webb, director of policy at Royal London, said:“If a low-paid worker wants to put £100 into a pension, it will cost them £80 if they get standard rate tax relief, but the full £100 if they do not. This all depends on the lottery of whether their employer has chosen a scheme which offers tax relief at source rather than using the net pay arrangement. Firms and workers cannot be expected to know obscure facts like how tax relief is administered in different sorts of pension schemes.  DWP and HMRC need to sort this issue out so that all low-paid workers get the help to which they are entitled with saving for a pension”.

 

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