The change introduced by HMRC aims to equalise lower earner’s pay, to level the playing field on a discrepancy around the way low earners pay into their pension in net pay arrangements versus relief at source (RAS) arrangements. Three quarters (75%) of those eligible for these payments are women, so communicating the change to staff is an inexpensive step that employers can take to make pay more equitable, says the leading pensions and financial services consultancy.
Individuals earning less than £12,570 a year don’t pay income tax. However, those in this bracket, and in a RAS pension scheme, receive a 20% ‘tax relief’ from the government on their pension contributions. In practice, this means that those earning less than this figure in a RAS pension scheme get a free 20% top from the government on their pension contributions, invertedly penalising those in net pay arrangements. Those earning the same amount but placed into a net pay pension scheme by their employer, do not receive such a top up on their pension contributions.
After a consultation in 2022, the government announced it would address this uneven approach by giving those in net pay pension schemes cash payments, rather than topping up their pension pot. These payments – made directly into individual’s bank accounts – will start this year. HMRC will be contacting eligible individuals, via a letter in the post, to request their bank details. Individuals will rightly be wary of scams. In this unusual case they will in fact be owed money they were likely not aware of, and this will be paid directly into their bank account if they respond to HMRC.
Commenting on why employers should communicate this change to their staff, Hannah English, Head of DC Corporate Consulting, Hymans Robertson, says: “Employers should seize this unique opportunity to give their employees a boost of income without any expense on their balance sheet. It’s an easy step for employers who are facing stagnating growth, and an increase in national insurance contributions, to help their staff.
“Employers are often their staff’s first point of contact for financial advice. This makes them ideally placed to bring this change to the attention of affected employees. Staff could easily disregard a letter from HMRC and miss out on the top-up, which would provide additional income during the current cost-of-living crisis. While this small detail may not sound like it has the potential to move the dial on the gender pay gap, it could certainly nudge it in the right direction. If all those eligible for these top-ups claim them – three quarters of whom are women – this could see a positive shift in the gender pay discrepancy.
“The power is now in the hands of employers to communicate this to their staff, to ensure that they do not ignore this opportunity to receive a top-up from HMRC. This is a simple, easy step employers can make to ensure some of their more vulnerable staff members do not miss out.”
HMRC has signalled its expectation that most people will not claim their money. If everyone eligible for these payments claims them, it would cost HMRC £84m a year. The amount HMRC has budgeted for these payments is around one-eight of that: £10m for this tax year, and £15m for the following tax year.
Commenting on HMRCs expectation, Hannah adds: “HMRCs signal that it expects most people to miss their letters, and not claim this money, further compounds the call for employers to communicate the change to their employees.”
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