Workplace pension provider NOW: Pensions has announced  that it will pay the Government’s workplace pension for the Government.

For the 2015/2016 tax year NOW will make up the income tax relief shortfall for members of its scheme that aren’t taxpayers and are currently missing out on the tax relief that they would receive in a relief at source scheme.

You might ask why the Government hadn’t found a way to pay it themselves. I’m wondering a lot about the behaviour of the Treasury and DWP.

The net-pay “anomaly”.

Members of pension schemes who don’t pay income tax, are nonetheless permitted to basic rate tax relief (20%) on pension contributions up to £2,880 a year. In practice this means that HMRC will top up a net contribution of £2,880 to a gross £3,600. 

However, this tax-relief is only available where the pension scheme operates on a relief at source basis. It is not available for schemes that operate a net pay arrangement, like NOW: Pensions and the vast majority of occupational and trust based schemes.

Until April 2015, both the nil rate tax band and the auto enrolment earnings threshold were £10,000 pa. That meant that employees eligible for auto enrolment were also income taxpayers, and therefore received tax relief regardless of which method of contribution their pension administrator adopted.

From April 2015, the auto enrolment earnings threshold remained at £10,000, but the nil rate tax band was increased to £10,600. This separation created a tax anomaly where members with salaries between the two figures are disadvantaged under net pay arrangements.

The anomaly gets worse from next month where the nil rate tax-band goes up to £11,000 and it’s going up to £11,500 next year. The auto-enrolment threshold stays at £10,000.

But it’s much worse than that, it’s not just those with earnings in fall in the gap who are affected. Many people get enrolled because their earnings spike for one pay-period  and unless they opt-out , they stay in. With employers unable to promote an opt-out and people staying in by accident, many people who are earning well below £10,000 will be in net-pay schemes purely by accident.

Morten Nilsson, CEO of NOW: Pensions says: “Through no fault of their own non taxpayers in net pay schemes are being disadvantaged because of the increase in the nil rate income tax band. We are talking to the Treasury and HMRC to find a way to resolve this anomaly over the long term but, in the interim, we will put our hands in our pockets to top up these members’ pension pots.

If I was Moreton Nilsson I’d be fuming

Firstly, it’s the Government not NOW which is breaking its promise

The Government has sold auto-enrolment to the public on a 4+3+1 basis.

This was the deal that NOW Pensions signed up to. The Government never said anything about this deal being exclusive.

It’s an accident of choice, NOW chose the wrong means of tax-relief. NEST chose the right kind of tax-relief but this was more by luck than judgement. NOW have been put at a commercial disadvantage because of the complexity of our tax system that nobody, including NOW’s tax-experts foresaw.

The anomaly is of the Government’s making , it was not NOW’s fault and it’s certainly not the fault of NOW’s participating employers that so many staff are missing out

Secondly the Government promised and failed to deliver a radical reform of the pension taxation system

Pension PlayPen pleaded with the Treasury to reform the anomaly so that people being enrolled into net pay schemes (principally Government schemes), got tax relief whether they paid tax or not.

We had reasonable cause to believe this would happen but political considerations got in the way. the planned changes in tax-relief that we were led to believe would have reduced the anomaly were ditched to keep high-earners and the conservative back-benchers happy.

Thirdly it now appears that the DWP’s Pension Minister has been obstructed by her Secretary of State

The one person who had made noises on behalf of the low-paid enrolled on an undelivered promise, the Pension Minister Ros Altmann, appears to have been baulked from doing something about this by an uncooperative Secretary  of State, more intent on scoring Brexit points than in looking after the low paid. This would certainly be the inference of the penultimate paragraph of this statement.

So who will ultimately pay?

As a long term solution, NOW: Pensions has discussed with HM Treasury and HMRC the possibility of a year end “sweep up”.

The proposal on the link has been discussed on this blog before. It would be good to think that the Government will pay-up but I fear that NOW’s Danish parent (ultimately the Danish Government) will pick up the tab.

The irony of the Danish Government stepping in to bail out British pensions will not be lost on savvy readers!

The reason I am not confident is that to bail out NOW’s policyholders, the Government would set a precedent that could end up bailing out all those impacted. The best estimate figure of the annual bill for a total bail out is £175m.

But until the Government publishes figures on the number of low-earners accidentally in auto-enrolment, we’ll have no idea what the real bill is. The Treasury is not in the habit of writing blank cheques, especially on pensions.

If you are in a net pay scheme and auto-enrolled, I hope that you are not earning below £11,000. If you are – then you might just want to contact me and I’ll pass on your details to those in authority.

Alternatively you might like to speak with a lawyer specialising in class actions.