Auto-enrolment provider Now: Pensions has hit out at pensions minister Ros Altmann after she publicly backed the ‘relief at source’ model of distributing pensions tax relief.
Pension schemes either operate on a relief at source or net pay model. In the former contributions are taken from members’ salaries after tax, with non-taxpayers receiving relief at 20 per cent.
The difference is then claimed back from HMRC.
Under net pay, contributions are deducted before tax, however non-taxpayers receive no tax relief at all.
Trust-based schemes, such as Now: Pensions or the Tesco staff pension plan, use this model.
It did not matter which model was used until April 2015, when the nil-rate tax band was increased while the auto-enrolment earnings trigger remain at £10,000. However, now people earning above the trigger but below the starting rate of tax could potentially lose out.
In July, Altmann tweeted: “I want employers to choose auto-enrolment pension schemes that offer relief at source, not a net pay arrangement, so low earners get tax relief due.”
But Now: Pensions chief executive Morten Nilsson says: “In the absence of a crystal ball, declaring that schemes operating on a relief at source basis will be the best option for employers with low paid workers seems presumptuous.
“It’s also questionable whether HMRC could cope if all schemes moved to a relief at source basis and it seems to be a very inefficient way of giving people tax relief.”
He adds that employees earning less than £18,000 qualify for a reduced administration charge, which “more than offsets the tax relief that a handful of members might be missing out on”.
The People’s Pension offers employers a choice of either systems but wants the Government to settle on one.
Director of policy and market engagement Darren Philp says: “We think relief at source offers the simplest option for the lowest earners – the very people auto-enrolment is intended to support.
“As the gap between the personal tax allowance and the earnings trigger for auto-enrolment grows, the number of savers losing the benefit of tax relief will grow.
“At The People’s Pension, we offer employers the option of either net pay or relief at source so that they can choose the method that works best for their employees.
“Having two methods of tax relief is neither simple nor transparent, and there is a real risk that it obscures one of the key benefits of pension saving. As the Treasury is currently looking at the future of tax relief there is an opportunity to simplify things for the future and any change should be considered as part of that.”