Now that most of us have had a well-deserved break since an all-consuming General Election campaign, we can all go about our business in this new year as normal, right?
For many sectors this largely depends upon whether or not the newly emboldened governing party comes good on its pre-election manifesto pledges which helped sweep Boris Johnson to power.
One promise in the world of pensions might seem marginal but is actually very important. This is the Conservative pledge of “comprehensive review” on a “fix” for the innocuously titled net pay anomaly. In fact, as it stands, 1.7 million lower paid workers do not get tax relief on their pension contributions because they are too poor to pay tax.
Many pension schemes provide tax relief through a system called relief at source (RAS), enabling lower earners to get the basic rate of tax relief they’re due automatically, while other pension providers enable tax relief through a net-pay scheme, where pension contributions are put into an individual’s pot before tax is deducted from their salary.
While this works well for most people, the vast majority of those who earn less than the £12,500 threshold for paying income tax miss and pay into a pension miss out. Despite still being entitled to tax relief on up to £3,600 of pension saving a year, if a worker’s scheme uses a net-pay system they won’t receive it, and because of the way auto-enrolment works, they pay up to 25 per cent more towards their pensions.
Put simply, a worker earning £12,500, and paying the monthly minimum auto-enrolment contributions, pays at least £63 a year extra, and in many schemes, where contributions exceed the auto-enrolment minimum, they will have to pay more than double this figure. When you are on low salary, even a small amount of money makes a big difference and the amount that these low-paid workers are losing out on are rising year on year.
Such is the level of concern, leading experts across the industry have come together in the Net Pay Action Group to hold the government to its pledge of a review and to offer expert technical support.
Page 16 of the Conservative Party manifesto was clear that a review into the issue was a priority and that review should begin by examining a solution proposed by the pensions industry – basically HMRC should have responsibility for identifying pension savers in net pay schemes, who earn below the income tax threshold. HMRC would then provide that tax relief through an existing process, either or an offset against tax liability.
In the seven years since its launch, auto-enrolment has enabled 10 million more workers to save for a pension but the net pay anomaly is one of those issues which could damage public confidence if not addressed urgently – it’s hard to argue that the lowest paid should not receive taxpayer funded support for their pension saving when those at the top end of the income scale do.
This is the kind of blue-collar issue that the new Government insists it is keen to focus on – ensuring that work and saving pay for all of those who work, not just the better off.