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17 Aug 2020
by Michael Ambery

Pensions tax relief: making improvements to better support low earners

The tax treatment of pension savers is far from straightforward. One of the most significant anomalies of the pensions tax relief legislation relates to low earners (whose income is under the personal income tax allowance), who receive less generous tax treatment if their scheme uses a net pay arrangement.

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To tackle this and other issues, the Treasury has published a Call for Evidence on tax relief administration.  It is looking to gather evidence on improvements that could be made to the administration of pensions tax relief. And specifically, to remove the anomaly that relates to low earners.

The Treasury has set out four approaches to address the anomaly. This is warmly welcome, and in-line with the manifesto promise which will help around 1.5 million individuals, due to the way their pension is taxed. However, the solutions can be fiendishly complex and this was originally part of a wider review of the whole tax-relief system which was dropped in 2016.

Administering tax relief

There are two methods for pension schemes to administer tax relief—relief at source (RAS) or using a net pay arrangement (NPA).

In a NPA an individual receives tax relief when pension contributions are deducted from their pay by their employer before tax is calculated. Where RAS is used, a pension scheme claims tax relief at the relevant basic rate from HMRC because the individual’s pension contributions are made from earnings after tax has been calculated (those who pay tax above the basic rate need to reclaim any additional tax relief from HMRC).

In the majority of cases, both methods will result in the same outcome for members, however, a difference in treatment arises where a member has earnings that are within the personal income tax allowance. Such a member will not receive tax relief if an NPA is used (because their earnings were not subject to tax in the first place), but they would receive a top-up equivalent to basic rate tax relief if RAS is used.

Ways to address this issue

While we are supportive of this issue being addressed, any solution needs to be put in context of the overall £40bn tax relief bill and ensure tax is not overly complicated, so that as individuals we know how to act rather than be confused. This may mean we need to understand and communicate tax treatment more clearly and regularly to each of our members. 

The author is Michael Ambery, head of DC provider relations at Hymans Robertson.

This article is provided by Hymans Robertson.

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