Auto-enrolment schemes at both the Department for Work and Pensions and The Pensions
Regulator apply the net pay model for tax relief that the Government has warned employers
People earning over £10,000 but under the starting rate of income tax – which currently sits at £10,600 – miss out on a 20 per cent tax relief top-up if their pension scheme uses net pay rather than relief at source.
Pensions minister Ros Altmann has persistently raised concerns employers are inadvertently enrolling staff into schemes whose rules mean low-paid workers could lose out on extra contributions.
The DWP and TPR use the defined benefit Alpha scheme and the defined contribution Partnership scheme. Other Government departments also use the schemes. While Partnership uses relief at source, net pay is used by Alpha.
TPR has updated its website where it helps firms choose a pension scheme, saying it is unsuitable to employ schemes using net pay, including master-trust Now: Pensions – if there are low-paid members of staff.
In a note published this week, the DWP says: “The Government is committed to keeping the matter under close review, particularly in the light of the outcome of the Treasury’s recent consultation on pension tax relief.
“Auto-enrolment is now entering a crucial stage in the rollout of this major reform and it is not
considered to be the right time to make significant changes to the existing framework.”
Government-backed provider Nest operates the alternative relief at source model, meaning non-taxpayers receive the 20 per cent top-up, while rival The People’s Pension offers employers a choice.
Now: Pensions and most occupational schemes use net pay. Now: Pensions is working with the
Treasury on a fix based on an ‘annual sweep’ that it says would solve the problem.
However, radical tax relief reform anticipated at the 2016 Budget could make the discrepancy between the different models of relief redundant.
A DWP spokeswoman says: “There are two pensions schemes available to people who join the department – a defined benefit scheme and a defined contribution scheme.
“The DWP DC pension scheme uses relief at source, so members who earn less than the personal allowance (currently £10,600 a year) still receive tax relief on their savings.“