Q: How should auto-enrolment policy approach the issue of some workers not getting tax relief?
Chase de Vere principal corporate consultant Sean McSweeney
The majority of trust-based schemes operate on a net pay, which means contributions are deducted from gross earnings but do not get grossed up. So those who earn between the auto-enrolment trigger of £10,000 and the nil-rate band of £10,600 will get no tax relief.
We have all the main parties pledging to raise the personal allowance to around £12,500 so that those on minimum wage do not have to pay income tax. If this happens, increasing numbers of people who are not in a scheme that claims tax relief for them at source will miss out on the 20 per cent relief they think they are getting.
This affects a small number of people at the moment but, if the tax threshold does rise, we could start to see a significant number of people beginning to ask the question ‘Where is the 20 per cent tax relief I have been told I am getting?’
This could prove a real headache for some of the master trust providers that are not set up on a relief-at-source basis.
Scottish Widows senior manager, retirement income and planning Ian Naismith
This may be a relatively small issue at the moment but it could get much bigger if the nil-rate band is lifted higher.
Our preferred approach is not to raise the trigger for auto-enrolment as this will exclude even more people from retirement saving. We would rather they lowered the earnings trigger than raised it.
It may be that more occupational schemes will have to move over to a net pay basis. Occupational schemes can choose to do this and have been able to do so since A-Day.
It is more straightforward for the employer to deduct contributions at source but the problem then is that higher-rate taxpayers have to make sure they get around to reclaiming their higher-rate relief. We have not done any research on the issue but there have been estimates that hundreds of thousands of higher-rate taxpayers are not claiming back their extra 20 per cent tax relief because they are not regularly filling in a tax return.
The other way around it could be to put low earners who are affected by the issue into a net pay scheme and keep the higher earners in the occupational scheme.
It is certainly true that workers who earn between the auto-enrolment earnings trigger and the earnings threshold for income tax are better off if they save in a scheme that operates on a tax relief-at-source basis than one that operates on a net pay basis.
This problem will not affect many people at the moment; in fact, you would need to be part-time to be affected as the minimum wage still takes you into the income tax bracket.
But given the Conservative Party’s stated aim of taking those on minimum wage out of income tax altogether, it looks like an issue that is going to get more significant as time goes on.
For that reason, employers that think they are likely to have significant numbers of workers who fall between these two thresholds, which looks like increasing considerably in the next few years, should take into account the basis on which tax relief is dealt with when they select a workplace pension.