“Now that the Government is finally addressing the so-called ‘net pay anomaly', around 1.2 million employees, 75% of whom are women, will be able to benefit by an average of £53 a year. It will not only help with the Government’s levelling-up agenda but will also help to close the pensions gender gap. However, low earners will have to wait for over three years for the top-ups to begin and there won’t be any Government payments in respect of pension contributions made in previous years.
“Although we welcome HMRC’s intervention and the £71 million investment in modernising pension tax relief administration, it’s unlikely to be plain sailing as the solution relies on non-taxpayers being engaged, trusting in the process and ultimately claiming the bonus. This could be a lot to ask.
“HMRC will start identifying non-taxpayers saving in net pay arrangement schemes from April 2025, using the PAYE reconciliation process, meaning changes for employers and potentially for pension providers. Top-ups will be paid in arrears, with the first bonus expected to be paid in respect of personal pension contributions made in the 2024-25 tax year. Unlike employers, HMRC doesn’t hold individuals’ bank details so will need to invite identified individuals to make a claim.
“The fly in the ointment is that HMRC will be relying on individuals to be responsive and make a claim, ideally digitally. Low earners tend to be the least engaged with their pensions so this will be challenging. In addition, there is heightened awareness of financial scams. The offer of ‘free money’ and communications out of the blue are hallmark signs of pension scams. Inviting people to go online and share their bank details is another sign. HMRC will need to tread carefully when planning their communication strategy, and may have to run a national campaign to increase awareness and trust to encourage people to make claims.”
What is the ‘net pay anomaly’
There are two ways of administering pension tax relief, using net pay arrangements or relief at source. These give different outcomes for those pension savers who earn below the personal allowance of £12,570 a year where they won’t pay income tax. Those saving in net pay arrangements receive tax relief at their highest marginal rate. This means that if they are non-rax payers they don’t receive any tax relief on their personal pension contributions. Whereas all those saving in a scheme which uses relief at source, typically personal pensions, will receive tax relief at the 20% basic rate regardless of how much they earn. This impacts take-home pay, and effectively means that non-taxpayers saving in schemes using net pay arrangements effectively pay more than their peers saving in a scheme using the alternative relief at source. Resolving this anomaly puts all low-earning pension savers in the same boat regardless of the type of scheme they save in.
The light was shone on the issue due to the way the auto-enrolment earnings trigger of £10,000 a year interacts with the personal allowance of £12,570. As these thresholds have diverged in recent years, an increasing number of employees have been auto-enrolled into a workplace pension schemes, many of which use net pay arrangements to administer pension tax relief, so have not been entitled to any tax top-up.
HMRC’s solution to address the net pay anomaly for non-taxpayers saving in certain pension schemes
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