Britons are being robbed of £60 million in pensions tax relief
Carers, nursery workers, admin assistants and other part-time workers are being robbed of £60 million from their pensions because they are unable to claim the tax breaks they are owed.
Many of Britain’s lowest-paid workers are being cheated out of a perk that’s supposed to encourage pension saving and is freely available to other workers — including the super-rich. Many of those affected are women.
The bonus, called pensions tax relief, means that every £1 paid into a pension should cost a basic-rate taxpayer 80p and a higher-rate taxpayer 60p.Crucially, the 20p basic tax relief is offered as an incentive to all savers even if they do not pay tax because they earn under £11,850.
But up to two million workers who earn less than £11,850 are not getting it, even though they are enrolled into a pension.
Even worse, a former pensions minister says that there is no way they can claim this extra cash — thought to be in the region of £60 million a year — directly from the taxman.
As a result, it will cost them more than other workers to build up a retirement fund.
The vast majority of the biggest pension firms operate a specific type of scheme, known as ‘net pay’ arrangements, which are unable to hand tax relief to the lowest paid.
With a net pay scheme, your employer collects your pension payment directly from your salary before income tax is deducted.
If you are a 20 per cent or 40 per cent taxpayer, that means you’ve already got your tax relief and there is nothing to claim. However, this system means if you do not earn enough to pay tax, you don’t receive anything extra.
By contrast, another type of pension scheme called ‘relief at source’ does allow these workers to get the top-up they are owed.
Under this scheme, money goes into your pension after income tax has been deducted.
The pension company then applies to HM Revenue & Customs to recover the tax relief workers are owed. It then pays this into the employees’ scheme.
This means everyone gets a 20 per cent top-up no matter how much they earn or whether they pay tax. Higher earners have to claim back any extra tax relief they are owed.
The bonus, called pensions tax relief, means that every £1 paid into a pension should cost a basic-rate taxpayer 80p and a higher-rate taxpayer 60p.
For workers earning under the £11,850 income tax threshold, the difference between the two systems is stark.
Calculations for Money Mail show that someone earning £11,850 a year in a net pay scheme would end up handing over £3.35 a week to make a 3 per cent contribution of their earnings towards their retirement.
By contrast, the same saver in a relief at source scheme would pay just £2.68 for the same 3 per cent contribution.
The 67p difference doesn’t seem much. But over a 30-year working life, the lower earner in the net pay scheme would have paid £1,020 more for a pension than the saver in a relief at source scheme.
It is thought that pension firms are anxious to avoid relief at source schemes for workers because they are viewed as being too complicated for higher earners on incomes over £46,351, as they have to complete a tax return or fill in forms and send these to HM Revenue and Customs to get their extra 20 per cent or 25 per cent tax relief on top of the basic perk.
The problem has become serious as millions of low-paid employees are being signed up to pensions by their bosses under so-called auto-enrolment rules, which came into force in 2012.
These state that bosses must enrol everyone over the age of 22 and earning more than £10,000 a year into a pension — whatever the company size. It means there are many more savers earning more than £10,000 but less than £11,850 than there were before.
According to actuarial firm Hymans Robertson, just three of the pension schemes aimed at savers who have been auto-enrolled run by the 17 largest of these pension firms allow customers earning between £10,000 and £11,850 to claim tax relief.
Those that bar the low-paid from the perk include some of the schemes run by Britain’s biggest insurer Aviva and investment giants Scottish Widows and Fidelity.
Nest, one of the biggest provider of auto-enrolment pensions, offers a relief at source scheme that automatically refunds tax relief to savers, as does insurer Legal and General, according to research.
Now Pensions, another big retirement firm, pays low-paid savers a sum equivalent to tax relief voluntarily, although it operates a net pay scheme.
There is no way for poorer workers who do not automatically receive tax relief via their pensions to reclaim the money from the taxman.
Former pensions minister Baroness Ros Altmann, who has campaigned on the issue, says she’d asked Government officials repeatedly to allow employees to reclaim the perk.
She says she was told the task was too difficult and the amounts involved too small. ‘The Government is forcing the lowest earners, mostly women, to pay extra for their pensions,’ she says.
Jesal Mistry, of Hymans Robertson, says: ‘The Government must correct this anomaly created through unintentional legislation and ensure the impacted receive what is theirs.’
An Aviva spokesman says that its ‘master trust’ scheme aimed at workers who have been auto-enrolled had targeted companies with full-time employees who earn more than the income tax threshhold. It says it runs other schemes with relief at source arrangements.
A Fidelity spokesman says that ‘net pay suits the majority of our clients’, but it could offer relief at source through its personal pensions.
A Scottish Widows spokesman says its master trust is net pay, but it offers other products with relief at source.
A Treasury spokesman says: ‘Workplace pension schemes are chosen by employers. The Pensions Regulator provides guidance on different schemes, including the implications for employees who don’t pay tax.
We appreciate the concerns of low-paid workers in net pay schemes and are talking with industry on the matter.’