The Chancellor’s failure to address an anomaly in tax rules which means that more than a million people on low incomes are losing out on tax relief on their pension contributions is extremely disappointing, says the Low Incomes Tax Reform Group (LITRG).
LITRG’s Budget representation and a joint letter recently sent to the Chancellor highlighted the unfairness for low earners who are in net-pay arrangement pension schemes rather than relief at source schemes.
The Group say that the increase in the personal allowance to £12,500 from 6 April 2019 means even more people will be affected by this anomaly, while the scheduled increase in the minimum pension contribution rate from three per cent to five per cent of income at the same time, means that the financial hit to them will be larger.
Anne Fairpo, LITRG Chair, said:
“Low earners in net pay arrangement pension schemes are being hit with a ‘triple whammy’ – no action to correct the tax disadvantage, more people affected by it and a bigger impact.
"The higher personal allowance and increased contribution rate taken together mean that the minimum pension contribution for someone earning £12,500 in 2019/20 will now cost them £323.40 rather than £258.72 [assuming the Qualifying Earnings limit remains at £6,032 in 2019/20] – because they will no longer get any tax relief to help make up their contribution amount. This is a difference of £64.68 – a week’s food shopping for a family or a tank of petrol for the family car.
"This means that the Chancellor’s assertion that the personal allowance increase translates into £130 more in the pockets of millions of hard working people, even on a basic level, will be wrong in many cases. While he may be giving £130 with one hand, he is taking away up to £64.68 with the other.
"At first the Government said that this situation had been allowed to develop because finding a solution was too complex. The ease at which we came up with our own solution suggests otherwise.
"The Government are now saying that this is in the hands of employers to do something about.1 But we understand most employers are choosing pension schemes blind to the net-pay problem and there is no specific outreach or educational work being done by the authorities to counter this.
"Perhaps the real reason for not tackling this is the cost, but the original policy costings for auto enrolment assumed that everyone would receive tax relief, so the government should have been ready for this. Parity of treatment is not only fairer, it is what was originally intended.
"This issue was already affecting more than a million people on the lowest incomes and, with the Budget changes, will affect even more. There is no rationale for allowing this unfairness to continue. We urge the government to take action to ensure the lowest earners in net-pay arrangements also receive tax relief so the benefits of auto-enrolment are not undermined."
- If employers choose Relief at Source pension arrangements, then all their workers will enjoy tax relief whether they earn above the personal allowance or not.