Is a Net Pay pension scheme ever suitable for those earning <£11,000pa?


With this straightforward question, our Pensions Minister puts her finger on one of the central problems with putting the implementation of pension policy in the hands of commercial employers.

Commercial employers pay attention to staff who are important and pay the minimum wage to the rest. If those who are earning less than £11,000 are to get a pension, it will be because they have to (by law) and not because the employer feels it has a moral obligation to help them to it.

So it is that good employers like Whitbread and good mastertrusts like Smarter Pensions and NOW! operate “net pay only” pension schemes that deny low earners tax relief that they would have got had they been in NEST, People’s pensions (mostly) or in a group personal pension.

Here are three myths that need to be debunked, all are directly relevant to the Pension minister’s questions

  1. This is all irrelevent- the sums lost and the numbers affected are so small
  2. People who pay no tax, should get no tax-relief
  3. It is not possible for master trusts to get relief at source because their administrator’s systems won’t let them

Let’s deal with each in turn

This is all irrelevent- the sums lost and the numbers affected are so small.

People who make this argument don’t understand auto-enrolment. There is a small proportion of the working population whose base earnings are between £10,000 and £11,000 who will be auto-enrolled into no tax relief (under net pay). There is a large proportion of those working in the UK whose earnings exceed the equivalent of £10,000 pa in one pay period. This includes a lot of personal service workers who might trip into auto-enrolment because they double invoice their employer.

The numbers quoted in the FT and Daily Express articles on this assume there are 900,000 people who could be losing out, a back of the envelope calculation suggests this could well be the case.

The numbers are not irrelevant, nor is the loss. Ok, people are only losing out on 0.20% of band earnings and that might in cases be only a few pounds, but a few pounds to someone on only a few pounds is a lot more than a few pounds on £100k. In any event, everyone has been promised a formula for pension contributions under auto-enrolment which includes a Government contribution by way of tax relief.

A promise is a promise, and if people are being denied the promised relief are right to treat this as serious. More importantly, NOW- who have been claiming that their super cheap charging structure makes the minimal loss of tax relief irrelevent are wrong. Tax -relief is a right under auto-enrolment and should not be denied.

People who pay no tax, get no tax-relief.

This is a statement that has recently appeared on one large employer’s pension website. Lawyers may argue that crediting people with relief at source may be a tax credit rather than a relief but this is legal wrangling and has no business keeping people from their money.

There may be people in our countries boardrooms who are anti redistribution and would like their money to stay in the pocket and not be spent on boosting the retirement pots of those on low earnings. But theirs are opinions that should be kept in the boardroom, the law of the land is that those on low earnings contributing to pensions are entitled to tax relief whether they pay tax or not.

It is not possible for many trusts to get relief at source because their administrator’s systems won’t let them

This argument is put forward by those who run trusts and employ specialist administrators (known as third party administrators or TPAs). TPAs have been happy to run net pay systems since the day dot because net pay pleases the top earning people who run occupational trusts and until recently, very few people worked and didn’t pay tax.

They say they have been caught on the hop by the rapid expansion of the nil rate tax band and only lately discovered the problems of people auto-enrolling into no tax-relief. They say they have no money to introduce new processes and that any spend would be redundant when the Chancellor announces changes in tax relief in next year’s budget.

All of these arguments ware pretty thin with people who aren’t getting their tax relief. I have sympathy with the trustees of NOW and of Smarter Pensions and the trustees of large single employer trusts, but not much.

NEST had no problem getting TATA- its TPA to offer net pay and trusts like People’s Pension and Supertrust offer both systems.

If NOW and Smarter  were doing their job properly, they would have done their due diligence on TPAs without reference to these questions. JLT were appointed as TPA to NOW and Smart pensions well after the rise in nil rate band was flagged by the last Government and the impact of running a net pay system was clearly ignored in this due diligence.

Frankly, it is up to the TPAs to put their houses in order or create a workable workaround in place PDQ.


Trusts can’t go on like this

The current situation is untenable. The net pay v relief at source issue isn’t going away any time soon and it is unacceptable that relief at source is being denied to so many. Whether you are working for a large NOW customer like ISS, or a single employer like Whitbread or you’re a worker for an SME or even a personal service worker, your tax relief is at risk under net pay.

Employers choosing workplace pensions are typically choosing blind with no way of choosing the type of tax relief they are getting their staff.  It is only a matter of time before we have employees affected complaining, complaining en masse and ultimately complaining using lawyers with a class action.

Remedial work starts with the trusts using net pay. Either they get their TPAs to change their processes, or they find a workaround, or they give up. But they can’t go on like this.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Is a Net Pay pension scheme ever suitable for those earning <£11,000pa?

  1. Henry

    I was at a People’s Pension seminar yesterday (19 November 2015) and their default position on signing up employers is tax relief at source.

  2. henry tapper says:

    Did they say this was new?

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