1.5 million workers paying extra 25% penalty on pension savings – are you affected?
Pension: Bernard Jenkin says 8% increase ‘can’t be justified’
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It is estimated that around three-quarters of those impacted by the costly tax anomaly are women.
Due to the way some employers’ pension schemes operate, workers are paying out an extra £65 a year.
Various pension schemes provide their employees a government-funded savings incentive through a tax relief system called relief at source.
Said system allows low-income workers to receive a taxpayer-funded contribution to their pension automatically.
However, many other pension scheme providers add this money into pots through a net-pay arrangement.
While this works sufficiently for the majority of workers, those who earn less than the £12,570 threshold for paying income tax are adversely impacted.
Workers who come under this pay bracket end up missing out on the tax-payer funded contribution to their pensions, which they would otherwise be entitled to, and end up paying it out of their own pocket.
Earlier this week, the Government published its responses to a number of tax consultations, but did not publish its call for evidence on ‘pensions tax administration’, which addresses this particular issue.
Last July, the Government launched its consultation on pensions tax relief administration, calling for evidence from potential stakeholders.
The Low Incomes Tax Reform Group (LITRG) has publicly criticised the general lack of progress in bringing justice to the country’s low-income workers.
As an initiative affiliated with the Chartered Institute of Taxation (CIOT), the reform group has set out to improve the policy and policies regarding tax, welfare and tax credits for the last 20 years.
Kelly Sizer, the LITRG’s Senior Technical Manager, issued her grievances about the government’s lack of action over this anomaly and contextualised how it likely affects the public.
Sizer said: “The cost of this pensions inequality for affected low-income workers can amount to the price of a weekly shop each year.
“This is an unacceptable penalty to pay for the same pension savings as their counterparts for whom their employer has chosen to use a relief at source scheme.
“Given this issue has been known about for several years, the cumulative cost is mounting and continues to do so the longer the Government delays in implementing a solution.”
“It is therefore disappointing that the Government has not taken the opportunity presented by Tuesday’s tax ‘Legislation day’ to respond to the call for evidence it published a year ago following its manifesto commitment on the issue.”
As part of the Conservatives’ winning 2019 General Election manifesto, the Government committed to addressing pension inequality.
The manifesto stated: “A number of workers, disproportionately women, who earn between £10,000 and £12,500 have been missing out on pension benefits because of a loophole affecting people with net pay pension schemes. We will conduct a comprehensive review to look at how to fix this issue.”
Despite the group’s public disappointment, Sizer outlined the LITRG’s ideal approach to addressing the tax inequality.
“While no solution is likely to be entirely straightforward, LITRG believes that we have found a pragmatic way to equalise the cost of pension contributions for all,” she explained.
“Our proposed fix is that HMRC use data they already have, collected via the PAYE ‘real-time information’ system, to identify those taxpayers affected and make a payment to them equivalent to the tax relief they would have received in a relief at source scheme.
“While there have understandably been other priorities over the last 18 months, we now urge the Government to take action to deal with this injustice as soon as possible.”
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