The change, announced with the fall 2021 budget on Wednesday, comes after calls to end a take-home pay anomaly were raised during the 2020 budget, and a subsequent call for evidence was issued.
The solution “will broadly equalize outcomes for all low-income savers,” Treasury Economic Secretary John Glen said in the foreword to the paper.
Currently, employees contributing to payroll relief schemes receive a 20 per cent top-up on their pension contributions, even if they do not pay or have a lower income tax rate. In contrast, employees contributing to a net pay scheme receive tax relief at their marginal rate, which, for those with taxable income equal to or less than the personal allowance, is 0 per cent.
The proposed solution for low-paid workers is messy, late, and may well be ineffective
The government said this “creates an anomaly in which individuals in similar situations receive different levels of tax relief and therefore have different take-home pay levels, depending on how their pension scheme handles tax relief for pensions”.
But the change will introduce a system to make top-up payments directly to low-income people saving in NPA schemes in respect of pension contributions made from 2024-25.
Depending on the response, up to 1.2million individuals, 75% of whom are women, could benefit from an average of £53 a year.
As a result of the change, all low-income savers should now enjoy similar results regardless of how their pension plan is administered for tax purposes, the government said.
Top-ups will be paid after the end of the relevant tax year, with the first payments being made in 2025-26 and continuing thereafter. The Treasury said the delay between the announcement and the implementation of this system is due to the complex nature of the IT systems changes required, as well as other ongoing delivery programs from HM Revenue & Customs.
The government intends to publish an L-Day 2022 Bill which will be legislated in a subsequent Finance Bill, although the government has said further discussions may be needed with the Scottish Government as its tranche of d The starting rate taxation is 1% lower than in England.
Sir Steve Webb, a former pensions minister and LCP partner, welcomed the change but said the proposals posed several problems, including reliance on workers claiming the top-up and the risk of “non-recourse massive”, while contributing more to the complexity of the pension system.
He said: “The proposed solution for low-wage workers is messy, belated and may well be ineffective. The problem of low-paid workers not getting tax breaks has been going on for a decade and will remain unresolved for another three years. And if it is based on people claiming these supplements, there is a real risk of non-recourse.
“This is yet another sticky plaster answer to a problem with the pension tax relief system, which needs a systematic overhaul,” he added.
Similarly, James Jones-Tinsley, technical specialist in self-invested pensions at Barnett Waddingham, said the change will benefit those on low incomes, but questioned the government’s approach to the announcement.
He said: “Finally, the government has seen fit to deliver on its 2019 manifesto commitment to address the pension tax relief loophole. Hidden in the little red book is the introduction of a system to make top-up payments directly to low-income people saving in pension schemes using a take-home pay system from 2024-25.
“It may seem like the fine print, but it will in fact directly support the 1.5 million low-paid workers, mostly women, harmed by the tax relief gap between workplace pension plans. the source” and “take home pay”, putting more money in the pension pots of the people who need it most.
“The fact [Rishi] Sunak didn’t see fit to include this in his speech, which however betrays a larger problem – the government consistently fails to adequately address the subject of pensions. Whether that’s because it’s too complex, too distasteful, or too politically controversial is unclear,” Jones-Tinsley continued.
“However, without real reform of the defined contribution annual allowance, the tiered annual allowance and the tax regime for death benefits, neither the UK pension dilemma nor the Treasury tax liability will be resolved. .”
The government will also invest £71million in modernizing the administration of tax relief for pensions, including RAS claims, and addressing the McCloud remedy.
In the response to the government’s consultation, there was a “clear consensus from the vast majority of respondents that the RAS was both more complex and imposed more burdens than net pay arrangements on schemes, the HMRC and members,” the document reads.
Of the respondents who commented on cost, all felt that SOP was more expensive to administer than net pay arrangements.
To overcome this, the government has announced a £71million investment in modernizing the administration of tax relief for pensions, including pension cost reimbursement claims.
Low earners miss out on £150m in pension tax relief
Low-income people have lost nearly £150million in pension tax relief, according to new analysis by Quilter.
This comes after numerous calls to promote digitization have been made to the government as part of the call for evidence.
The document says there was “overwhelming support for digitizing RAS”, with almost half of respondents expressing opinions on the subject and all were supportive.
Although the government acknowledged the industry would need time to prepare, with one response suggesting a period of 12-24 months, respondents said electronic form submissions should continue after Covid.