View more on these topics

Adrian Boulding: Annual ‘sweep’ could solve auto-enrol tax relief problem

Boulding-Adrian-2012-700x450.jpg

There has been a lot of comment in the media recently about the fact that there are two different ways that pension schemes can collect the tax relief that savers enjoy when contributing to a pension.

This prompted the pensions minister to chastise The Pensions Regulator for lack of clarity in their own communications on the subject.

There is a nasty wrinkle in the system for employees who earn less than £10,600 a year and so don’t pay tax. Under the net pay model, used by most occupational schemes and Now: Pensions, they pay no tax and so get no relief.

But under the alternative, relief at source, HMRC automatically send them the 20 per cent back even though they are non-taxpayers.

So if employers choose a net pay scheme, they get no tax relief, yet if their employer had chosen relief at source they would get 20 per cent back.

We’ve come up with an end of year “sweep up” idea for net pay scheme which would resolve this problem but would involve some extra work for both pension schemes and HMRC.

At the end of the tax year, the pension scheme would submit a declaration to HMRC of employee contributions received under the net pay method, showing one line per member, identified by national insurance number and showing their total employee pension contribution during the year.

HMRC match the pension data against P60 data, and identify employees who missed out on pension tax relief because they paid pension contributions under a net pay arrangement but received no benefit as their total taxable earnings for the year was below the income tax personal allowance.

HMRC calculate the missing relief, which will be 25 per cent of the pension contribution, but subject to a ceiling as if the total of taxable earnings for the year and pension contributions made is greater than £10,600 then relief will have already have been granted under net pay for the top slice of pension contribution that took the total above the personal allowance.

HMRC send one payment to the pension scheme with a record breaking it down to the amount for each employee against their national insurance number.

The pension scheme applies the payments to the accounts of each affected individual, purchasing additional units at the date of receipt of the payment from HMRC. The payment is shown on the employee’s pension plan as “tax relief for employee earning below income tax personal allowance”

Crucially, the solution places no burden on the employer and doesn’t require any action by the employee.

We’re taking our proposal to the Treasury and hope that this current hiatus can soon be resolved.

Adrian Boulding is director of policy at Now: Pensions

Recommended

barclays-building-2012-700x450.jpg

Barclays to increase B2L rental cover ratio due to tax relief cut

Barclays is set to increase its rental cover ratio as it is expected landlords will incur higher costs because of the cut to tax relief announced in the summer Budget. From 7 December, Barclays’ rental cover ratio will increase from 125 per cent to 135 per cent for all new applications. There will be no other […]

Shadow pensions minister raises ‘serious concerns’ over tax relief reforms

Labour shadow pensions minister Nick Thomas-Symonds says he has “serious concerns” the Government could be planning to cut upfront tax relief in a “short-term dash for cash”. Speaking to Money Marketing, Thomas-Symonds hit out at one of the proposals set out by the Chancellor. He also criticised pensions minister Ros Altmann’s attack on the industry […]

Ros Altmann
2

Now: Pensions in ‘catch 22’ over Govt tax relief stance

Now: Pensions says it is caught in a  “catch 22” after the pensions minister warned employers against its chosen tax relief model. This week Ros Altmann wrote to The Pensions Regulator asking it to warn employers that providers using a ‘net pay’ arrangement do not allow people earning under £10,600 to claim tax relief on their contributions. […]

4

Frank Field: Slash pension tax relief to ease tax credits cuts

Work and pensions committee chairman Frank Field has proposed cutting pension tax relief to fund delays or reductions in the planned cuts to tax credits. Speaking in a debate in the House of Commons yesterday, Field suggested the Government could either target a smaller budget surplus by 2020 or introduce a flat-rate of tax relief […]

Generation Rent

By Denise Wond, marketing manager We’ve heard a great deal about Generation Rent in recent years but what does it actually mean for consumers and advisers and has the face of the typical renter changed? The picture is certainly more diverse than it used to be. Homeownership is at its lowest point in 30 years, […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. The issue is that some get the tax relief to which they are not entitled, some don’t. It would surprise me if HMRC agreed that the solution is to extend the anomaly rather than ignore or even close it.

  2. This ‘wrinkle’ also applies to private provision – non tax payers can fund pensions and get ‘tax relief’ for tax they don’t pay. This is the price of a (relatively simple) system where net basic relief is applied automatically.

    Whilst Mark is correct with the assertion that what is outlined above is facilitating the giving of ‘free money’ to those who are otherwise not really entitled to is, arguably the last thing we need is even more change and complication to the pension tax system and legislation

Leave a comment