Following calls by pension providers, unions, campaign groups and two former pension ministers, the government has announced that it will be looking at addressing the 'net pay' anomaly that currently sees an estimated 1.2 million low earners miss out on government top-ups to their pension contributions. The government said that it was looking at ways to 'tackle any differences' in how pensions tax relief was provided.
The issue occurs because the government allows pension savers to claim tax relief upfront in the form of a government top-up on what they pay into a pension. This is to encourage people to provide for later life. The relief is paid at the same rate as income tax, so basic rate taxpayers get 20%, and higher earners get 40% or 45% depending on their particular circumstances.
However, those who are earning less than £11,850 per year and therefore not enough to pay tax can still qualify for the top-up on their pension contributions, up to a set amount. This means that a non-taxpayer can pay up to £2,880 a year into a pension fund and have this topped up by up to £3,600 by the government. In reality however, most of the non-taxpayers contribute a tiny fraction of the maximum allowed.
Those that are in pension schemes that have "net pay" arrangements however have been denied the top-up, and campaigners say that approximately 1.2 million low earners are in schemes that have no mechanism to pay them their government contribution, resulting them missing out on an average of £40 per year.
The government has said that it was "looking at the opportunities provided by the move to a modern digital tax system to tackle any differences of treatment in provision of tax relief for pensions." However, the exact fix and when this might come into effect has not been announced yet.
Former pensions minister Baroness Ros Altmann said that she was "delighted that the Treasury was working on a solution for this injustice to the lowest earners in automatic enrolment."
"This scandal could undermine the whole auto-enrolment programme and must be stopped straight away, before more people lose money in this unfair system," she said.