The Chancellor has announced plans to address the ‘net pay anomaly’ which has seen many low-paid workers miss out on tax relief on their workplace pension contributions.
However, pension experts have criticised the plans for being too complex and taking too long to implement.
Rishi Sunak has announced that those in net pay arrangement pension schemes will be able to claim a top up payment, that will match the tax relief they would have received if their workplace schemes was on a ‘relief at source’ system.
However these payments will only be available from April 2025, and will only be paid to members who put in a claim for this money. There will be no automatic redress paid.
The Treasury estimates this will affect around 1.4m workers, predominantly women, who will benefit by an average of £53 a year.
LCP partner Steve Webb welcomed this move to address this issue, but says the solution remains “messy, belated and likely to be ineffective”.
He says this problem has been going on at scale since the start of automatic enrolment a decade ago, yet will still not be resolved for another three years.
Webb adds that if the solution remains dependent on workers claiming a top-up, there is a real risk that there will be massive non take-up.
He adds: “This is yet another sticking plaster response to a problem with the pension tax relief system which needs a systematic overhaul”.
Les Cameron, head of technical at Prudential UK says: “The Government has opted for the ‘real time information solution’ which means HMRC makes good the anomaly once it has received a person’s annual pay information.
“This means there will be a lag in the benefit being received. The benefit will not come through until April 2025 as the first payments which qualify will be those made from April 2024.”
However he added that this does minimise disruption for pension schemes and suggests there are no plans to move to a flat rate of tax relief in the near future.
Hymans Robertson partner Mike Ambery says: “It is great to see the government announcing that it’s at last abolishing this inequality for low earners in respect of net pay arrangements (rather than Relief at Source). We support every incentive for individuals to save and engage with pensions and have been calling for these technical inequalities to be eroded for many years.
“This will be very welcome news for just over a million people saving into pensions. It is just a shame that these savers will have to wait for three years for the changes to actually come into force to be finally able to benefit.”
James Jones-Tinsley, self-invested pensions technical specialist at Barnett Waddingham, said: “At last – the Government has seen fit to meet its 2019 manifesto commitment to resolve the pension tax relief loophole.”
He adds that the fact this change was “hidden” in the little red book rather than being annonced in the Budget speech betrays a wider issue. “the Government consistently fails to adequately tackle the topic of pensions. Whether this is because it is too complex, too unpalatable, or too politically divisive is unclear. However – without real reform of the money purchase annual allowance, tapered annual allowance, and pension death benefits tax regime, neither the UK’s retirement dilemma or the Treasury’s fiscal debt is going to be resolved.”
