The government has admitted it has never provided a “straightforward and proportionate” solution to the challenges in the current pensions tax relief system in an official call for evidence on the topic.
The expected consultation announced in this year’s Budget comes after a report published by the Public Accounts Committee (PAC) called on the government to conclude whether the £38bn estimated cost of pensions tax relief in 2018/19 was effective.
The PAC said the government had failed to estimate whether the cost is an encouragement for retirement savings and said HM Revenue and Customs (HMRC) needed to publish data to show a clear breakdown of groups benefiting from relief.
In the 40-page call for evidence, released on 21 July, however, the Treasury outlined the differences in outcomes for some low earners under the current relief system. It has also collated issues raised by stakeholders along with suggestions for changes to the tax relief administration.
The call for evidence states: “The government considers that any administrative changes should be sustainable, long-term reforms that provide stakeholders with confidence and certainty. This means any changes need to be enduring and not create further unintended consequences and, as such, any changes need to be considered in the round alongside and within the wider context of pensions tax relief administration.”
Central to issues about equalising low earners are questions concerning schemes’ choice to operate as either net-pay or relief-at-source (RAS) arrangements, and how employers are engaged in the decision making. The call for evidence asks pension schemes about what factors are considered to influence their choice of relief, and whether the method of tax relief a scheme operates is a relevant factor in employers’ decisions.
The call for evidence states: “To completely align the tax treatment for those contributing to pension schemes with the same incomes but using different methods of tax relief would require a number of steps. In addition to considering what the individual has saved in the scheme, it would be necessary to consider both the amount individuals receive in their pay packet and the amount of personal allowance available after the tax on their earnings have been calculated.”
The main approaches suggested so far by stakeholders to address the issue include paying a bonus based on real-time information, introducing a standalone charge on RAS schemes, and mandating the use of RAS for defined contribution (DC) schemes.
The government said mandating the use of RAS would be a “more radical approach” and has outlined three different versions of this proposal.
“Requiring all DC schemes to transfer to RAS would be a significant change for providers who currently operate net pay,” the government stated. “However, it does have the strong attraction of introducing a single method of tax relief for some or all DC savers which could remove the need for employers to consider the operation of tax relief when choosing a pension scheme for their employers.”
Respondents to the call for evidence will be asked whether requiring DC pensions to operate RAS would be fair and whether it would result in existing schemes having to re-evaluate their arrangements.
A further question looks for respondents’ suggestions on what changed to relief overall would ensure “consistency in outcomes” across “all aspects of the tax system.”
Another proposes that a balance must be struck in “ensuring consistency in outcomes as far as possible, but prioritising simplicity for individuals.” Within this, the government said it would look for feedback that looked at solutions “likely to build trust and engagement” within the pensions system.
Smart Pension director of policy Darren Philp said: “The current system of tax relief creates an anomaly for lower-paid individuals auto-enrolled into a net-pay scheme and this needs to be rectified to deliver the benefits of increased pension saving in a fair way for all.
“It is simply not fair or just that 1.7 million people are losing out through their pay packets due to a quirk in the tax system. This consultation is a positive step to addressing that issue and creating fairness across the board.”
Responses to the call for evidence will be open until 11pm on 13 October.
Economic secretary to the Treasury John Glen said: “I am mindful that pensions administration can only be effectively delivered through successful partnership between government, the pensions industry, employers, and professional administrators of payroll and other systems.
“The government, therefore, wants to listen to all those who work with these systems on a regular basis to understand the options available to improve the administration of pensions tax relief.”