Campaigners call for government action on pension tax relief losses

The Group highlighted that members of relief at source pension schemes who do not pay income tax, typically those earning less than £11,850 each year, are entitled to basic rate tax relief on pension contributions up to £2,880 a year.

However, this tax relief is not available for non-taxpayers in net pay arrangement schemes. This means that somebody in NPA, earning £11,850, paying the minimum contributions required under auto enrolment, is missing out on £34.91 in the current tax year as compared to someone in a RAS scheme.

More importantly, pension contribution rates are set to increase from 3% to 5%,  but the LITRG says many on low incomes will not be able to obtain the government contribution promised to them to help make up the 5%, which may act as a disincentive as it makes auto enrolment effectively 20% more expensive for them.

LITRG has suggested a solution that would see HMRC using PAYE data to identify those making pension contributions under net pay arrangements.

They could then provide tax relief through an annual reconciliation process – whether that is through self-assessment or – as is more likely – the informal P800 process (the annual reconciliation HMRC perform to check whether those outside self-assessment have paid the correct amount of tax).

LITRG joins a group of signatories, which includes NOW: pensions and two former pensions ministers – Steve Webb and Ros Altmann, of a letter sent yesterday to Chancellor Philip Hammond, urging him to make the changes.

LITRG chair, Anne Fairpo, said: “Low earners are in a pension lottery through no choice of their own. Those whose employers use traditional RAS schemes receive basic rate tax relief on their contributions. Those – a majority – whose employers use the more recently created NPA schemes do not. This is unfair.

“The upcoming increase in pension contribution rates from three per cent to five per cent makes auto enrolment a much bigger consideration for the lowest paid. But many people on low incomes will not be able to obtain the government contribution promised to them to help make up the five per cent and this may act as a disincentive as it makes auto enrolment effectively 20 per cent more expensive for them.

“We recognise there are cost implications to putting NPA contributors on an equal footing with those using RAS but our understanding is that this is the basis on which automatic enrolment was originally costed. Parity of treatment is not only fairer, it is what was originally intended.

“We urge the Chancellor to take the opportunity to put things right for low paid pension savers as soon as possible and ideally, before the five per cent contribution increase hits in April 19. Otherwise there is a real risk that the benefits of auto enrolment will be undermined.”