Now: Pensions to pay missed tax relief for low earners

Morten-Nilsson-with clock-700.jpgNow: Pensions has announced it will ensure non-taxpayers will not miss out on the tax relief they would get in a relief at source scheme by making up the shortfall for affected scheme members.

The pledge, which affects payments in the 2015/2016 tax year, will see information about the top up included within members’ 2015/16 benefit statements and communicated to employers.

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

The completed claim form and letter of authority will need to be submitted to Now: Pensions by the end of October 2016

Now: Pensions would then liaise with HMRC to confirm that these members do not pay tax. Once confirmed, Now: Pensions will credit members’ pension pots with the income tax relief they would have received in a relief at source arrangement.

This amount will be credited by the end of March 2017 to coincide with the scheme year as well as the tax year.

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.

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. Low earners, including part-timers, in net pay schemes who have not been auto-enrolled, have been missing out on tax relief for years.

The provider says it will address a long-term solution once the future of tax relief on pensions is clear.

Now: Pensions CEO Morten Nilsson says: “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.

“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.”