HMRC ‘looking at opportunities’ to address net-pay tax anomaly

James Phillips writes...

The government is set to review an anomaly which sees lower-paid workers in the majority of master trusts lose out on tax relief, it has confirmed.

HM Revenue & Customs (HMRC) said it was exploring “opportunities” to address the difference of treatment when pensions tax relief rules are applied to savers in net-pay and relief-at-source schemes.

Currently, savers whose earnings fall below the £11,850 personal tax threshold and are members of net-pay schemes, lose out on 20% tax relief which is automatically applied to savers in relief-at-source schemes.

The issue, which is particularly hitting low-paid workers enrolled in pensions through automatic enrolment (AE), has been described as a “hidden scandal” with 14 of the UK’s largest master trusts using the system.

A HMRC spokesperson has now confirmed to PP that the government will look to address the matter.

“The government is looking at the opportunities provided by the move to a modern digital tax system to tackle any differences of treatment in provision of tax relief for pensions,” they said.

It comes after industry heavyweights, including two former pensions ministers, last week wrote to chancellor Philip Hammond urging him to address the issue in his upcoming Budget on 29 October.

In the letter, 10 signatories, including Baroness Ros Altmann and Sir Steve Webb, estimated about 1.2 million people are missing out on the tax perk, adding: “To prevent AE being undermined, it is essential that the government takes decisive action.”

Now Pensions, which also signed the letter, welcomed the government’s latest commitment. its director of policy Adrian Boulding said: “This is an important issue which has been swept under the carpet for too long. We look forward to working with HM Treasury and HMRC to make sure all savers are treated equally.”

The department’s latest affirmation follows an earlier statement by Department for Work and Pensions minister Baroness Buscombe, who said in June: “The government will examine the processes for payment of pensions tax relief for individuals to explore the current difference in treatment.”

How the two systems work

Under the relief-at-source method, pension contributions are deducted after tax is calculated, and HMRC then sends tax relief back to the scheme at the basic rate of 20%, which is then added to all employees’ savings.

However, under the net-pay method, pension contributions are deducted before tax is calculated, and savers receive tax relief directly based on their marginal rate. This means that savers who earn under the £11,850 tax threshold do not receive the 20% relief they would through their employer in a relief-at-source scheme.