Tax anomaly could deny “hundreds of thousands” of lowest paid the right to 20% pension benefit
10 Apr 2018 - Estimated reading time: 2 minutes
Only three of the top 17 master trust providers offer the ability for their lowest paid members to claim additional pension tax relief according to research from Hymans Robertson, the leading pensions and benefits consultancy. ‘Mastering Master Trusts’ reveals that workers in the majority of arrangements arrangements could be missing out on as much as a 20% Government bonus to their retirement savings pot because of the legislative technicality.
This tax anomaly affects those earning below the income tax threshold but over the minimum level for auto-enrolment. As of April 2018, this is currently anyone earning between £10,000 and £11,850. The issue was first created in April 2015 when the lower AE threshold was held at £10,000 but the nil point rate tax band was raised to £11,500.
Pension scheme members who don’t pay income tax are still allowed to claim a basic rate of tax relief of up to 20% on pension contributions worth up to £2,880 a year. However, the research shows that the majority of members in this band are missing out on the potential bonus.
Jesal Mistry, Head of scheme design and provider evaluation at Hymans Robertson comments:
“Over the last five years the industry has watched Master Trusts evolve from being a relatively niche option serving the needs of smaller employers, to today where they are increasingly seen as the DC vehicle of choice. They have grown to represent over 35% of the workplace savings market and account for the savings of over 7 million DC scheme members in the UK. The fact that only 3 of the Master Trusts we surveyed offered tax relief at source is not just surprising but a major concern as it could mean thousands of individuals auto-enrolled are not receiving the tax relief they were promised.
“When the ‘relief at source’ method is used pension deductions are taken from net pay and the basic rate of tax-relief is then credited by the pension provider and claimed back through HMRC. Instead, the majority of Master Trusts use a ‘net pay’ arrangement where pension deductions are taken before income tax, resulting in the exclusion of those earning less than £11,850 from this relief measure. The tripling of AE minimum contributions in April this year to 3%, and the planned further rise to 5% by 2019, although necessary, will serve to further compound this issue for an individual that is already not receiving the tax relief to which they are entitled.
“So, how can this issue be resolved? As our research shows a small number of providers are already able to accommodate a tax-relief at source system. For those that don’t, a sizable investment is necessary to adapt their administration system. In the absence of any real movement here it must be now up to Government to correct this anomaly created through unintentional legislation and ensure that the impacted many receive what is rightfully theirs.”