As the Government’s call for evidence on pensions tax relief administration1 closes this week, the Low Incomes Tax Reform Group (LITRG) urges swift action to end the injustice that an estimated 1.5 to 1.75 million2 people on low incomes (mostly women) are charged 25 per cent more for their pension contributions due to the way their employers’ pensions schemes operate.
Alongside other members of the Net Pay Action Group,3 LITRG’s proposed solution is that HMRC reimburse the tax relief that affected individuals have missed out on. HMRC could take data they already receive from employers to work out the amount due, suggests LITRG.
Victoria Todd, Head of LITRG, said:
“Action must be taken to ensure all low-income workers get a government contribution to their pension, as was promised under auto-enrolment. Currently an estimated 1.5 to 1.75 million people miss out – three-quarters of whom are women.
“The numbers affected will only grow as auto-enrolment is extended to 18-year-olds and the lower earnings limit is removed. Failure to act could damage confidence in pensions and auto-enrolment.
“We believe the call for evidence misrepresents the impacts of our proposal.4 The additional administrative burdens indicated in that paper are either mistaken or over-stated.
“While we recognise that our proposal adds some complexity, it is important to balance the oftentimes competing objectives for the tax system. In this case, we believe that some complexity is a reasonable price to pay to fix the inequality.”
Notes for editors
1. HM Treasury, Pensions tax relief administration: Call for evidence: https://www.gov.uk/government/consultations/pensions-tax-relief-administration-call-for-evidence, closed 13 October 2020.
This was issued following this 2019 Conservative party manifesto commitment:
“A number of workers, disproportionately women, who earn between £10,000 and £12,500 have been missing out on pension benefits because of a loophole affecting people with net pay pension schemes. We will conduct a comprehensive review to look at how to fix this issue.”
2. Many low-income workers in pension schemes operating on a ‘net pay’ basis miss out on tax relief on their contributions and effectively pay 25 per cent more for their pension savings than those in otherwise equivalent circumstances who contribute to a ‘relief at source’ basis scheme.
Latest available figures (Written Parliamentary Question HL2729: https://www.parliament.uk/business/publications/written-questions-answers-statements/written-question/Lords/2020-03-18/HL2729/) give an estimate of 1.5million people in net pay pension schemes missing out on tax relief as they are earning below the personal allowance. However, this figure is for 2017/18 when the personal allowance was £11,500 which then rose to £11,850 for 2018/19 and the £12,500 for 2019/20 (frozen too for 2020/21), so the figure may well be higher than 1.5 million now. The PAC report quotes an estimate of 1.75 million, with three quarters of those being women.
3. The members of the Net Pay Action Group are: Low Incomes Tax Reform Group, Baroness Ros Altmann, The Chartered Institute of Payroll Professionals, AgeWage, NOW: Pensions, The People’s Pension, Pension and Lifetime Savings Association, The Investing and Saving Alliance, Association of British Insurers, Trades Union Congress, Age UK, Royal London, Smart Pension, The Pensions Administration Standards Association, Ruston Smith.
4. LITRG’s 2020 Budget Representation (https://www.litrg.org.uk/latest-news/submissions/200204-budget-representation-2020-net-pay-action-group) set out why many low-income workers in pension schemes operating on a ‘net pay’ basis miss out on tax relief on their contributions and effectively pay 25 per cent more for their pension savings than those in otherwise equivalent circumstances who contribute to a ‘relief a source’ basis scheme. The Call for Evidence document refers to this proposal as ‘suggested approach 1’.
5. The Net Pay Action Group and LITRG responses to the call for evidence are available here.
6. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998, LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact Hamant Verma, External Relations Officer, 0207 340 2702 HVerma [at] ciot.org.uk / Out of hours contact: George Crozier, 07740 477 374