Last Wednesday (2nd April) Ministers were quizzed on this issue by the DWP Select Committee and they admitted that they “did not know” how many workers were affected. But based on an FOI reply issued on Friday (4th April) Royal London now believes that up to 1.75m workers could be missing out – around half a million more than previously thought.
The issues arises for workers who have to be enrolled into a pension because they earn more than £10,000 per year but who are earning under the income tax threshold – now £12,500 per year. It is thought that around three quarters of these workers are women in low-paid or part-time jobs.
Whether or not these workers benefit from pension tax relief depends on what sort of pension arrangement their employer has chosen. Workers whose employer has chosen a Group Personal Pension arrangement benefit from tax relief because tax relief is given through the ‘relief at source’ method. But workers in most trust-based occupational pension schemes (and in most public service pension schemes) get no tax relief because tax relief is delivered in a different way which excludes those earning under the tax threshold.
Until now, the only information available was from an FOI supplied to the Low Income Tax reform group, and was based on HMRC data for 2015/16. This found that 1.22m workers were at risk. However, following the release of the 2016/17 ‘survey of personal incomes’ data, Royal London tabled a follow-up FOI which found that the number losing out had risen to 1.33m by 2016/17, an increase of around 110,000. But, as the table shows, this increase happened at a time when the income tax personal allowance had risen by just £400 (from £10,600 to £11,000). Since then, the allowance has risen by another £1,500 (alongside a continued rapid rollout of automatic enrolment, bringing millions more low-paid workers into pension saving).
Assuming that each extra £400 on the personal allowance (alongside the rollout of automatic enrolment) brings an extra 110,000 people into the net, the further increase of £1,500 might be expected to add another 412,500 by 2019/20. This would bring the total number affected to just under 1.75m – half a million more than previously thought.
Ministers told the DWP committee that each worker losing out was missing out on an average of £35 per year. Multiplying this by 1.75m workers suggests a combined loss of around £60m every year until this problem is resolved.
Commenting, Steve Webb, Director of Policy at Royal London said: ‘It is a scandal that so many low-paid and part-time workers are missing out on tax relief on their pension contributions. This is the group that most needs a boost to their pension savings. These new figures suggest that the scale of the problem is much bigger than previously thought. It is simply not good enough for ministers to say that it is not cost-effective to deal with this problem’.
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