Employers should opt for auto-enrolment schemes that offer relief at source rather than net pay arrangements says pensions minister Ros Altmann.
Baroness Altmann told her 11,200 Twitter followers yesterday that employers should opt for a scheme with relief at source to ensure low earners do not miss out on tax relief.
Altmann tweeted: “I want employers to choose an auto-enrolment pension scheme that offers Relief at Source, not a Net Pay Arrangement, so low earners get tax relief due.”
The call relates to the fact that low earners just above the earnings trigger saving in trust-based arrangements are missing out on tax relief because their schemes operate on a net pay basis, as highlighted in Corporate Adviser last month.
Tens of thousands of pension scheme members could be missing out on 20 per cent tax relief on their contributions because they do not pay income tax and are not in a scheme where their scheme claims tax relief for them at source. The majority of trust-based DC schemes do not operate on a relief at source basis.
The problem has emerged because of the income tax personal allowance has since April exceeded the earnings trigger for the first time. Eligible workers earning over £10,000 a year must be automatically enrolled into a scheme, but only those earning £10,600 pay income tax, meaning those earning between £10,000 and £10,600 pay no tax upon which to receive relief. The government is committing to increase the income tax threshold over the course of the parliament, increasing the numbers affected.
Experts have highlighted that there are advantages to net pay arrangements as well as disadvantages. Higher rate taxpayers in tax relief at source schemes not set up on a salary sacrifice basis often forget or neglect to claim back their higher rate relief, but do not need to do so in net pay arrangements, where they get their tax relief automatically.
Towers Watson senior consultant David Robbins says: “By the same logic, does she want more employers to operate salary sacrifice so that employees get the NIC relief available?
”Employers don’t want to change scheme just as we are launching into the consultation into pension incentives that could see the TEE basis abolished. And employers will also want to consider those employees who are 40 per cent taxpayers, who do not have to go to the trouble of reclaiming their tax relief where they aren’t in salary sacrifice arrangements if they are in a net pay scheme.”