OVER 1.2million lower earners in the UK will get a valuable pensions tax relief boost from 2024, Budget documents reveal.
While Chancellor Rishi Sunak’s Budget announcement focused on alcohol duty, Universal Credit tapers and Innovation investment, buried in the Red Book there is an important shift in how pensions tax relief works.
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Under the current system, millions of low-paid workers miss out on tax relief because of the way their employers’ choose to administer pensions contributions.
The changes are designed to fix that inequality and make sure that everyone benefits from a government boost when saving for retirement.
Under the new system, 1.2million low-paid workers will get an extra £53 a year on average paid into their pension and the government says 75% of the people affected are women.
The problem with the current system is employers have two options when it comes to pensions tax relief, one is called “relief at source”, while the other is called “net pay arrangement”.
Under Relief at Source, pensions contributions are taken from your post-income tax pay, but then the government adds back tax relief.
This means that everyone automatically gets 20% tax relief added to their contributions.
Higher and additional rate tax payers are entitled to more, but they have to claim this back via the government.
Under the Net Pay system (NPA), pensions contributions are made from your pre-tax pay.
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Because you only pay income tax on the money you earn after pensions contributions, you end up paying less tax overall.
This works well for higher earners because they automatically get relief at their marginal rate of 40 or 45%.
But for people who earn less than £12,570, it means they don’t get any tax relief at all on their savings.
This also applies to people who have multiple jobs, but where each job earns less than the tax threshold.
This is because none of their income would have been taxed anyway, so they don’t benefit from the relief.
Under the new system, over a million lower earners will be able to get the tax relief.
The changes will come into force from 2024, with the relief being added from the following tax year.
Even though the new systems is supposed to be simpler, experts have raised concerns that low earners will not get the cash automatically, which means many will miss out.
More worryingly, the government’s own figures suggest they think most people won’t claim the bonus.
Phil Brown, director of policy at B&CE, provider of The People’s Pension, said:
“This is welcome news as this flaw has deprived more than a million lower earners – mostly low paid women – of a much-needed boost to their savings. But this fix will rely on HMRC contacting affected savers, who’ll need to be alert to claim their money.”
David Robbins, director at Willis Towers Watson, said: “Putting the onus on individuals to claim a top-up inevitably means that many won’t. The Government rightly says there is a lot of uncertainty about take-up, but estimates the cost at £15 million a year. This implies that under a quarter of the money available will actually be claimed.
There was also widespread criticism that the reforms will not take place for three more years.
In the response to the consultation, the government says this is due to technical hurdles and other commitments.
It said: “The time lag between announcement and implementation of this system is due to the complex nature of the IT systems changes required, as well as other ongoing HMRC delivery programmes.”
Steve Webb, partner at LCP said: “The proposed fix for low-paid workers is messy, belated and may well be ineffective. The problem of low-paid workers missing out on tax relief has been going on for a decade and will still go unfixed for another three years.
“And if it relies on people claiming these top-ups there is a real risk of non take-up. This is yet another sticking plaster response to a problem with the pension tax relief system which needs a systematic overhaul”.
Sunak also announced reforms to the National Minimum Wage this afternoon.
He pledged that on April 1, 2021, the NMW will rise to £9.50 an hour from the current rate of just £8.91.
More to follow…
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Chancellor Rishi Sunak poses with red case before leaving Downing Street to deliver Budget
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