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