Low Incomes Tax Reform Group’s disappointment at government inaction on pension tax anomaly affecting 1.5 million low-income workers
|The Low Incomes Tax Reform Group (LITRG) is disappointed at a lack of progress towards rectifying an inequality which sees an estimated 1.5 million or more low-income workers paying a 25 per cent penalty for their pension savings. This issue can cost those affected (three-quarters of whom are women) around £65 a year due to the way their employers’ pensions schemes operate.|
|The Government today published its responses to a number of tax consultations but not to its call for evidence on ‘pensions tax administration’, which covers this issue. This is despite the call for evidence being concluded longer ago than a number of the consultations on which it has responded.
Many pension schemes provide a government-funded savings incentive (in the form of tax relief) through a system called relief at source, enabling lower earners to get a taxpayer-funded contribution to their pension automatically.
But other pension providers add this money through a net-pay arrangement. This works well for most people, but not for those who earn less than the £12,570 threshold for paying income tax. These people miss out on the taxpayer-funded contribution to their pensions they would otherwise be entitled to and end up paying it themselves.
Kelly Sizer, Senior Technical Manager at LITRG, said:
“The cost of this pensions inequality for affected low-income workers can amount to the price of a weekly shop each year. This is an unacceptable penalty to pay for the same pension savings as their counterparts for whom their employer has chosen to use a relief at source scheme.
“Given this issue has been known about for several years, the cumulative cost is mounting and continues to do so the longer the Government delays in implementing a solution.
“It is therefore disappointing that the Government has not taken the opportunity presented by today’s tax ‘Legislation day’ to respond to the call for evidence it published a year ago1 following its manifesto commitment on the issue.2
“While no solution is likely to be entirely straightforward, LITRG believes that we have found a pragmatic way to equalise the cost of pension contributions for all. Our proposed fix is that HMRC use data they already have, collected via the PAYE ‘real-time information’ system, to identify those taxpayers affected and make a payment to them equivalent to the tax relief they would have received in a relief at source scheme.3
“While there have understandably been other priorities over the last 18 months, we now urge the Government to take action to deal with this injustice as soon as possible.”