Workplace pension anomoly could see low earners miss out
The Government has confirmed the key thresholds that will apply to workplace pensions for 2019/20. The earnings threshold for ‘auto-enrolment’ will be frozen at £10,000 for 2019/20. However, at the same time, the personal allowance is rising to £12,500. While this takes more people out of tax, it also means they could miss out on tax relief for their pensions.
AJ Bell points out that pension scheme savers are entitled to tax relief at their marginal rate. Members of ‘relief at source schemes’ get basic-rate tax relief of 20% automatically regardless of how much they earn, with higher and additional-rate taxpayers able to claim extra through their tax returns. Non-earners are entitled to receive tax relief on contributions worth up to £2,880.
However, some companies only take contributions from net pay for their workplace schemes. As such, tax relief is only provided to those who pay tax in the first place. Those earning above £10,000 (the auto-enrolment earnings trigger) but below the personal allowance (2017/18: £11,850; 2018/19: £12,500) miss out.
Tom Selby, senior analyst at AJ Bell, said: “The ‘net pay’ auto-enrolment problem looks set to get worse before it gets better as the gap between the point at which members pay income tax and the earnings level at which they get automatically enrolled widens from April next year.
“Over a million people in net pay schemes are already thought to have been affected by this anomaly, which robs them of the valuable tax relief they are entitled to when saving in a pension. It is particularly cruel that this flaw in the system affects the lowest earners.
“The DWP has now passed the buck to HMRC, hoping that the shift to becoming ‘one of the most digitally advanced tax administrations in the world’ will provide a ready-made solution. But until that happens this pension tax injustice will continue.”