Morten Nilsson, CEO of NOW: Pensions said: “Through no fault of their own non taxpayers in net pay schemes are being disadvantaged because of the increase in the nil rate income tax band. We are talking to the Treasury and HMRC to find a way to resolve this anomaly over the long term but, in the interim, we will put our hands in our pockets to top up these members’ pension pots.
Nilsson continued: “We believe that net pay offers a number of benefits to savers and if we can agree a work around with HMRC we’d be keen to do this in order to avoid the upheaval and expense of moving to relief at source.”
The net pay anomaly
Members of pension schemes who don't pay income tax, are nonetheless permitted to basic rate tax relief (20%) on pension contributions up to £2,880 a year. In practice this means that HMRC will top up a net contribution of £2,880 to a gross £3,600.
However, this tax relief is only available where the pension scheme operates on a relief at source basis. It is not available for schemes that operate a net pay arrangement, like NOW: Pensions and the vast majority of occupational and trust based schemes.
Until April 2015, both the nil rate tax band and the auto enrolment earnings threshold were £10,000 pa. That meant that employees eligible for auto enrolment were also income taxpayers, and therefore received tax relief regardless of which method of contribution their pension administrator adopted.
From April 2015, the auto enrolment earnings threshold remained at £10,000, but the nil rate tax band was increased to £10,600. This separation created a tax anomaly in that members with salaries between the two figures are disadvantaged under net pay arrangements.
Differences between net pay and relief at source
With net pay, contributions are deducted from the member’s gross salary before tax is deducted. Therefore, whether the member pays 20%, 40% or 45% tax, they enjoy full tax relief up front and
immediate investment of the gross contribution. However, in a net pay scheme, non-taxpayers will not receive the tax relief they are entitled to.
In relief at source arrangement, contributions are taken from the member’s net salary after tax. The amount deducted is 80% of the gross contribution.
Under relief at source, non-taxpayers still receive tax relief at 20% and this relief is claimed from HMRC on behalf of the member, and invested directly into their pension fund.
Higher rate tax payers have to claim back the difference up to 40% directly from HMRC, normally through an adjustment to their tax code. Additional rate taxpayers are only permitted to make the additional claim through their tax return form.
How will the top up work?
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Information about the top up will be included within members’ 2015/16 benefit statements and communicated to employers
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Members who do not pay income tax on their earnings will be directed to a short claim form on the NOW: Pensions website and a letter of authority, permitting HMRC to divulge tax details to NOW: Pensions in respect of the 2015/16 tax year
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The completed claim form and letter of authority would need to be submitted to NOW: Pensions by the end of October 2016
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NOW: Pensions would then liaise with HMRC to confirm that these members do not pay tax
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Once confirmed, NOW: Pensions will credit members’ pension pots with the income tax relief they would have received in a relief at source arrangement
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This amount will be credited by the end of March 2017 to coincide with the scheme year as well as the tax year
As a long term solution, NOW: Pensions has discussed with HM Treasury and HMRC the possibility of a year end “sweep up”.
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