Net pay pension problem ‘fixed’, but low earners lose millions in tax relief

by | Jul 20, 2022

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Following the publishing of the government legislation confirming that 1.2 million low earners will see a boost in take-home pay because it is tackling the net pay pension tax issue, Jon Greer, head of retirement policy at Quilter has commented.

He said: “After many years of outcry from the industry, the government finally committed to addressing the inherent inequality for low earners in pension net pay schemes versus relief at source schemes.

“Today, the government has published legislation confirming that it is still set to go ahead with the changes although there has been no shift of the time frame and the longstanding dithering has resulted in 1.2 million workers needing to wait until the 2025/26 tax year to see change. What’s more, the relief will only applied to contributions made from 2024/25, meaning low earners will have forgone millions in pensions tax relief due to years of the government sitting on their hands.

“The Conservative party manifesto recognised the problem and pledged to solve the issue all the way back in November 2019. By the time it is eventually fixed, hundreds of millions will have been lost in pension funds by 1.2m lower earners, three quarters of whom are women.

“The net-pay tax flaw means some workers earning £12,570 a year or less could retire with a pot worth thousands of pounds less than others. This is because people enter into a perverse lottery where those who are in a net-pay pension scheme don’t benefit from government tax relief into their pension pots, while other workers who are in a ‘relief at source’ scheme receive the top up.

“While it is laudable that the government is actually tackling the problem, its solution remains imperfect, but at least better than the current situation, as it commits to paying a top-up contribution directly to the person’s bank account. However, this ultimately means they will lose out on potential growth by not having the money held in the pension fund and invested.

“This solution also creates a risk of delay between the pension contribution being made and receiving the top-up. It’s been a long road to get to this point, and there are still some miles to go before this quirk in the pension tax system is finally addressed.”

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