When Guy Opperman became Pensions Minister , he had” financial inclusion” inserted into his title; now comes his challenge.
According to Government statistics, there are 675,000 qualifying workers in the “savers rate” of tax, ( the tax band where we pay no tax). Latest estimates suggest that around 300,000 (just under half) of these “savers” are not getting the promised incentives because they are in the wrong kind of scheme.
That is no fault of theirs; it’s because nearly 300,000 people in net pay arrangements “don’t get tax-relief because they don’t pay tax”, while a slightly larger group get a “Government Incentive” because they happen to be a scheme that operates under relief at source.
Ironically, the largest group of disadvantaged pension savers work for the Government, Government pension schemes operate the net pay system.
Some people have argued that this inequality goes away when pension salary sacrifice is used. It is true that salary sacrifice equalises the positions of low earners but it does so by disadvantaging all low-earners.
| RAS Non-salary sacrifice | Salary sacrifice | Net pay Non- Salary sacrifice | |
| Monthly pay | £100 | £90 | £100 |
| Employees NI | (£12) | (£10.80) | (£12) |
| Pension contribution | (£10) | Nil | (£10) |
| Take home pay | £78 | £79.20 | £78 |
| Pension contribution | £10 | £10 | £10 |
| Tax relief under relief at source | £2.50 | – | – |
| Employer NI added to pension at 80% | – | £1.1 | – |
| Total received by pension scheme | £12.50 | £11.10 | £10 |
| Total benefit, i.e. take home pay plus pension contribution | £90.50 | £90.30 | £88 |
Even if an employer shares 80% of the employer national insurance saving, those on the “savers rate” still get little benefit from salary sacrifice. Salary sacrifice only works for those who get an NI “kicker” and can quality for tax-relief – because they pay tax.
If you “salary-sacrifice” as a tax-payer, you and your employer not only get NI savings you get tax-relief – immediately and at your highest rate.
It means that for every £10 you save, you get a minimum of £2.00 back from the Government and a maximum of £4.50. So a basic rate tax payer sees his/her cost of saving £10 under our salary sacrifice model fall to £92.50 and the higher rate tax-payer to £95.00.
Unbelievably it can cost a super-earner a fiver to save a tenner while the lowest earner pays twelve quid for the same thing!
It gets worse. We have seen that salary sacrifice can make the saver on net pay a little better off (in our example a £10 pension contribution costs £9.70 rather than £10).
But most pension savers who pay no tax are not allowed to get the benefits of salary sacrifice – they are excluded from salary sacrifice because they are on minimum wage
The Government that promised a “savers rate” and “Government Incentives” but has excluded those on the minimum wage, not just from getting the Government Incentive, but from participating in salary sacrifice!
Obstacles to change
There has been a roaring silence from the pension trade bodies on this subject. Only Ros Altmann among “pension heavyweights” has campaigned to include the poorest savers. A flash poll conducted by Professional Pensions magazine found that nearly half (47%) of pension professionals were not only unaware of these problems but saw no reason for change.
Compounding the problems of low-awareness are the fiendish complexities of entitlements and the complexities of the national insurance system.
If the Government are to act on these fiscal exclusions they need to be mindful of two points
- If you earn less than £157pw you get no national insurance saving
- If you sacrifice below £113 pw – you could be losing rights to the state pension
The lowest paid need to make every week count towards ‘qualifying’ for state benefits including single tier pension. Everyone needs to get to the magical 35 years of qualifying earnings.
Earnings between £113 and £157 fall in the “deemed NI” band but if you earn less than £113, you could be counting yourself out of state pension.
Despite these problems, the Government seem committed to increasing the scope of those covered by auto-enrolment with hints that the lower earnings limit to qualify may be reduced or even removed. They have also pledged to find a way to include the self-employed, many of whom are on the “savers rate” of tax.
We need to ensure that the problem is not made worse. Urgent attention needs to be paid to these issues by HMRC and the DWP. There are nice perks for pension saving, but too few low earners get them. Never mind the width – we owe low earners some quality!
This is a scandal orchestrated either by George Osborne’s lack of understanding of how the pension contribution tax relief would be affected or his purposeful exclusion of relief to the poorest sector of the economy. I’ll not say which I think but the situation was caused by him and the Treasury’s lack of action to correct it.
Auto enrolment was marketed by the Government with very clear videos, tv coverage and even tPR’s compulsory assessment standard letters quoted that contributions must be made by employers, employees if the employer wouldn’t cover all the cost AND it WILL be topped up with tax relief; there was no if’s or but’s they were told they would get tax relief and the DWP and tPR drafted the compulsory communications. This amounts to the very clear message everyone would get tax relief and to then cause a change to omit relief to a large sector of savers is a massive mis-selling exercise to the public.
If this was a private concern which marketed pensions with ‘bells and whistles’ and then took them away then the Regulators would have come down them hard but as it is the Government the Regulators have just changed their marketing material and quietly sit back and do nothing to lobby the Treasury to put it right.
After the Chancellor changed the earnings threshold and left the trigger point intact tPR have now changed their standard letters to ‘may’ get tax relief, very convenient.
I have written several times with an easy solution and that is to provide the tax relief for those who are below the taxable income threshold by using the RTI employer payroll submission. Employers would use a tax code for employees under the LEL who are making pension contributions which would add the basic rate relief to their contribution and offset the amount from the RTI submission to HMRC. The system is similar to how investors get tax relief on ISA savings with the exception it is not the provider who tops up the relief, it is the employer.
Treasury, DWP and HMRC get your act together and put this right. You developed the anomaly in the first place and it can be easily be put right. If not then it is because you don’t want to and you couldn’t care less about the people who are not currently getting what you promised
Bob Ward DipPFS
This issue has been around a lot longer then AE has. And it is not the fault of George Osborne.
Low earners using Salary Exchange also run the risk of losing out on other State Benefits such as SSP and SMP.
There are also potential problems in store when applying for a mortgage as many lenders will (understandably) look at the post Exchange income.
And finally for now, given most low earners and part time staff are female, denying them tax relief because they’re in the wrong kind of scheme is indirect sex discrimination.