• The Treasury has today published a call for evidence on pension tax administration as it seeks to deal with ‘net pay’ anomaly (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/902338/Pensions_tax_relief_administration_CfE_docx.pdf)
• Low-earning members of schemes where contributions are taken out through net pay miss out on basic-rate tax relief
• Four potential reform options assessed in the document:
o Paying a ‘bonus’ to lower earning members of net pay schemes
o Imposing a stand-alone charge on lower earning members of ‘relief at source’ schemes
o Requiring employers to operate both net pay and relief at source schemes
o Requiring all DC schemes to operate relief at source taxation
Tom Selby, senior analyst at AJ Bell, comments:
“While the Government has started to fulfil its manifesto commitment to ‘conduct a comprehensive review’ of ways to address the issue of low-earning workers in ‘net pay’ schemes missing out on pension tax relief, this initial stage of a call for evidence raises more questions than answers.
“The suggestion a charge could be imposed on members in relief at source schemes who earn below the personal allowance would be a retrograde way of solving the inequality that exists in the system, and should be ruled out immediately.
“It is also not clear what such an approach might mean for the pension saving of those with no income, for example children or those taking a career break, where basic-rate tax relief is provided automatically up to £3,600.
“All the other options on the table either add extra complexity to the system or create additional cost for employers (or both).
“Mandating all DC schemes move to relief at source taxation, for example, is attractive from a simplification point of view but would burden both employers and pension providers currently operating a net pay arrangement.”
