That’s the accusation from Quilter, which argued that the approach of ‘“kicking the can down the road” had already cost low earners almost £150m over the last couple of years. It noted that back in November 2019 the government recognised the issue with tax relief not being paid on pension contributions for those on smaller wages and pledged to put things right, yet still nothing has happened.

Not receiving tax relief

One of the perks of saving in a pension is that you receive tax relief on your contributions from the government, which helps your money go further. The tax relief paid is based on your rate of income tax ‒ basic rate taxpayers get 20% relief, higher rate taxpayers get 40%, while additional rate taxpayers get 45%.

However, there are two different ways that employers can deduct your contributions, and that’s causing the issue.

The first is called relief at source, where your contributions are taken from your net salary, so after tax has been paid. Your employer takes 80% of your total contribution from your salary, with the pension scheme then claiming 20% directly from the government.

This is a big boost for those who earn less than the personal allowance, meaning they don’t actually pay any income tax, as they still receive the tax relief.

The other method is called a net pay arrangement, where your contributions are deducted from your gross salary, so before tax has been taken. The idea is that the contributions will lower the amount of income tax you then pay on your remaining salary, but this makes no difference to those who are not earning enough to pay income tax.

While the government consulted on the issue last year, it has not yet published any plans to address the quirk which means the pension contributions of low earners change based on the sort of scheme their employer uses.

What difference is it making?

According to Quilter’s calculations, low earners have missed out on around £142m in pension funds since 2019, with 1.5 million people in the last tax year losing out on £62.60.

Women are most likely to be caught out by this anomaly, accounting for around two-thirds of the people impacted.

Ian Browne, retirement planning expert at Quilter, warned that the government did not appear to comprehend the cost of its slow action on this issue, emphasising that every year in which the net pay issue is not addressed, millions of pounds are lost by low earners.

He continued: “On top of the growing gap created by the Government, we are seeing an increase in multi-jobbers. Many people who have several jobs with lower pay will miss out on the government top-up more than once and it will accumulate to have a dramatic impact on their future prosperity.

“The Chancellor appears keen to create a name for himself and  fixing issues and quirks in the system that are unfairly impacting working people then the net pay issue should be high on their agenda, even if it isn’t dominating front pages.”