Pension tax relief boost for 1.2m low-paid workers (but they will have to wait another three years)
More than one million low-paid workers will finally get a pension boost — but not for another three years.
All savers should receive tax relief of 20 per cent on pension contributions.
But, due to a quirk in the system, around 1.2 million workers — three-quarters of whom are women — do not currently benefit from this vital top-up.
All savers should receive tax relief of 20% on pension contributions. But due to a quirk in the system around 1.2 million workers do not currently benefit from this vital top-up
The anomaly hits those who earn less than the personal allowance of £12,570 — the amount of income you can pocket each year before you pay tax — who are in a so-called net payment arrangement scheme.
There are two ways money can be deducted from your pay and put into your pension.
Under a method known as ‘relief at source’, you get tax relief whether you pay tax or not.
Your pension provider claims the basic rate tax (20 per cent) from the Government and adds it to your pension pot.
But under net payment arrangements you pay the full amount into your pension and then get the relief back later via a deduction in your total tax bill for the year.
Yet if you do not earn enough to pay tax, you will not get anything back. This means you are paying more for your pension.
In his Budget last week, Chancellor Rishi Sunak pledged to fix the issue, giving those affected an average of £53-a-year extra towards their pension.
But the new system will not come into force until the tax year beginning in April 2024. And you cannot reclaim any money until the April 2025-2026 tax year.
Experts also criticised plans to put the onus on savers to claim back the cash themselves, which could mean many will continue to lose out.
Former pensions minister Steve Webb, from consultancy LCP, says: ‘The proposed fix for low-paid workers is messy, belated and may be ineffective.
‘This is yet another sticking plaster response to a problem with the pension tax relief system which needs a systematic overhaul.’
Victoria Todd, head of The Low Incomes Tax Reform Group, says: ‘The move suggests that those affected will need to take some sort of action to secure a top-up payment. This may discourage people from accessing it.
‘HM Revenue & Customs needs to ensure the process is accessible, simple and automated as far as possible.’
Baroness Ros Altmann, a former Conservative pensions minister, welcomes the change but adds: ‘It is disappointing that nothing will change before 2025 and until then these low earners will pay more for their pensions than they should.
‘But at least the end is in sight to this injustice. The pension provider should claim the cash back for them, otherwise many will not do it.’