Pensions Tax Relief Anomaly Corrected

Employees do not pay Income Tax of the value of their pension contributions.? There are two methods of giving tax relief on pension contributions depending on the pension scheme and payroll set-up:

1. Net Pay Arrangement (NPA) – where an individual receives tax relief when pension contributions are taken out of their pay by their employer before tax is calculated, or
2. Relief at Source (RAS) – where the pension scheme claims tax relief at the relevant basic rate from HM Revenue & Customs (HMRC) because individuals make pension contributions out of their earnings after tax has been calculated.?Individuals who pay tax at rates higher than the basic rate can claim any extra relief directly from HMRC

It is a statement of fact that there is tax relief on pension contributions.? Yet, the two methods do not give equal tax relief.?

An individual in a RAS scheme will get tax relief even if they do not actually earn enough to pay Income Tax.? Yet, where a low earner does not pay Income Tax and they are in an NPA scheme, there is no tax relief that can be applied.

Point 5.34 of Autumn Budget 2021 said:

So, this is not Income Tax relief though the payroll nor is it Income Tax that can be added to pension funds claimed by the pension provider.? It is relief payments that are made directly to the low-earning individual, i.e. one that earns below the annual Personal Allowance.

This anomaly is not new but became more evident when the Personal Allowance exceeded the Earnings Trigger for Auto-Enrolment (￡10,000) – in 2015.

The 2019 Conservative Party Manifesto pledged to address this and issued a Call for Evidence in July 2020.? This stated that the anomaly could be corrected but could not use existing PAYE and RTI processes.? Alongside the Autumn Budget, the Call for Evidence Response was published which stated that ‘significant HMRC IT system changes’ meant that a correction could not be made until the 2024/25 tax year.? HMRC’s Pension Schemes Newsletter 134 published on 29 October 2021, point 1.1 says:

We’re currently developing and changing our systems and expect the first payments will be made towards the end of the 2025 to 2026 tax year.

So, these top-up payments will be effective from the start of tax year 2024/25 (06 April 2024) but will not actually be made until ‘towards the end’ of the following tax year.

On 20 July 2022, the UK Government published draft legislation that will be included in the Finance Bill 2022/23.? This will insert a new cause into the current legislation on tax relief (Finance Act 2004) entitled ‘Net pay arrangements: relief where no income tax liability’.

At the same time, HMRC published a Policy Paper that gave details about the proposal:

• This will apply for pension contributions in NPA schemes from tax year 2024/25 onwards (as announced previously)
• The top-ups will be paid ‘as soon as possible’ in the following tax year (a difference from ‘towards the end’ of the following tax year)
• HMRC will ‘invite’ people who are eligible to receive the top-up to provide the details necessary to make the ‘appropriate amount’ into their bank accounts
• The ‘appropriate amount’, i.e. the value of the top-up, will be calculated at the ‘relevant rate’ which is the Basic Rate for rUK, Welsh and Scottish Taxpayers, currently aligned at 20%

It took a long time coming and it is not here yet.? Although, after an anomaly of nearly 10 years, it is pleasing that the anomaly is being corrected.? According to the Policy Paper, this will impact 1.32 million people earning below the Personal Allowance and in NPA schemes – 75% of who are women.

I am sceptical of these HMRC ‘invites’ to individuals, so let’s hope that this is a secure and simple process as I can already see this as an opportunity for people to make a profit from this.? These invites also require positive action from the individual to claim the top-up – they are not automatic. ? So, although the payroll department / employer is not directly-impacted, might there be an argument for increased communication and education?? Surely, this is the responsible thing to do, always remembering that we are not financial advisors.

As to the ‘significant’ HMRC IT system development time that has been allowed, let’s hope that this is reflected in development time that they give payroll and software developer professionals in the future.

Hmmm.