HM Treasury has confirmed it is looking to tackle anomolies in the auto-enrolment system which has seen up to one million low-earners miss out on tax relief.
Its statement, which says it is “exploring opportunities” to redress this problem, was welcomed by the pensions industry.
This problem has arisen because of the difference in the way pension tax relief rules are applied on net-pay and relief-at-source schemes.
Workers whose annual salary is less than the personal allowance (currently £11,500 a year) but who are automatically enrolled into a pension do not get the 20 per cent tax relief if they are in a net-pay scheme.
However under a relief-at-source scheme pension contributions are deducted after tax is paid, and HMRC sends tax relief back to the scheme at the basic rate of 20 per cent, which is added to employees’ savings.
Non-taxpayers can claim tax relief on pension contributions up to £3,600 a year.
Many of the largest master trust pensions in the UK, used for auto-enrolment, are net-pay schemes.
Aegon’s head of pensions Kate Smith says: “We are pleased to see that the Treasury is working to address the imbalance which means that at present over a million low earning individuals are missing out on Government top-ups on their pension contributions.
“It is unfair that those earning less than the personal income tax allowance currently miss out on tax relief.”
She adds: “Government should act quickly as the ‘net pay’ anomaly is set to rise further as the minimum auto-enrolment contributions are due to increase in April. By taking action now the Government will avoid even more individuals missing out on the government contributions they should be entitled to.”
She adds that if this issue is not address it could potentially undermine the auto-enrolment programme.
A recent freedom of information request carried out by Aegon shows that there were 11 million employees earning less than the personal income tax allowance in 2016/17 where the allowance was £11,000pa – this is for all jobs.
Hymans Robertson’s head of scheme design and provider evaluation, Jesal Mistry says: “Over the last five years the industry has watched master trusts evolve from being a relatively niche option serving the needs of smaller employers, to today where they are increasingly seen as the DC vehicle of choice.
“They have grown to represent over 35 per cent of the workplace savings market and account for the savings of over 7m DC scheme members in the UK.
“The fact that only three of the Master Trusts we surveyed offered tax relief at source is not just surprising but a major concern as it could mean thousands of individuals auto-enrolled are not receiving the tax relief they were promised.”