United Kingdom

Lost tax relief for low earners, pension minister warns

March 2016


Low earners could be cut out of auto enrolment into workplace pensions if pension contributions are calculated with net pay arrangements, pensions minister Ros Altmann has warned.

According to Altmann who spoke recently at the Trades Union Congress (TUC), those on low incomes were at risk of losing up to 25 per cent in tax relief from their pension contributions depending on how their contributions are calculated.

Net pay arrangements (NPA), where gross contributions are deducted from pay accrued before tax differ from tax relief at source (RAS), whereby net contributions are deducted from post-tax pay.

RAS arrangements however, can be beneficial for low earners, even those whose pay is below the tax threshold, as contributions are still made at the basic tax rate and contributions are 'grossed up' by pension providers.

Sarah Hamilton, Senior Pensions Consultant at Aon Employee Benefits said: "It is the lower earners who really need help to save towards retirement. So it is a shame that they may miss out on the extra help given by the government in the form of tax relief just by virtue of the type of scheme they are in."

Since 2012, millions of Brits have been automatically enrolled into workplace pension schemes, but Altmann warned that the success of the scheme would depend on peoples' experiences with it.

"We must help the smaller employers. The type of scheme your employer chooses for you can be crucial for the pensions of the low paid," she said. "We want people to have a good experience of saving into a pension. If they don't, will this policy succeed? I don't think it will. There is a huge opportunity and huge challenges for the pensions industry. Auto enrolment at the minimum is really just a start."

Hamilton added: "It was widely anticipated that the government would address this issue in last week's Budget as part of the outcome of its consultation on tax relief. However, this did not happen, so the emphasis should be on ensuring that companies selecting a pension scheme are given help and guidance to ensure that they chose one that suits the needs of their workforce."



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