1.8m workers may be missing out on pension tax relief
The estimate follows a freedom of information (FOI) request issued by Royal London’s director of policy Steve Webb, who was formerly a pensions minister.
The reply to the FOI suggests more low-paid and part-time workers are missing out on tax relief on their pension contributions than was previously forecast.
In light of the FOI, Royal London estimates that up to 1.75 million workers may be missing out on pension tax relief, around half a million more than previously anticipated. These workers have been enrolled into a pension because they earn more than £10,000 per year, but remain under the income tax threshold – which now stands at £12,500 per year.
Why are workers missing out?
Royal London estimates that around three quarters of these workers are women in low-paid or part-time jobs. They may be missing out on pension tax relief if their employer offers a trust-based occupational pension scheme, which does not offer ‘relief at source’. Instead, tax relief is delivered in a different way and excludes those with earnings under the income tax threshold.
It is worth noting that ‘Group Personal Pension’ arrangements benefit from tax relief at source.
Royal London came to this conclusion after an FOI showed that 1.33 million workers in 2016-17 were at risk of missing out on tax relief, an increase of around 110,000 workers from the previous year.
This increase happened at a time when the income tax personal allowance had risen by £400 from £10,600 to £11,000. Since then, the allowance has risen by another £1,500.
Royal London also highlights the continued rollout of automatic enrolment, which has brought millions more low-paid workers into a workplace pension scheme.
Assuming that each extra £400 on the personal allowance and the continued rollout of automatic enrolment brings an extra 110,000 people into the net, the further increase of £1,500 to the personal allowance could add another 412,500 workers by 2019/20, according to Royal London.