The HMRC’s position on pension taxation reached new heights of barminess last week, with its decision to let the new “19% Scottish taxpayers” receive 20% relief at source. This is Apparantly one of those problems that gets put in the too difficult box.
But while it’s fine to give away tax to troublesome Scots, some of the most vulnerable of British citizens, low-earners in net pay schemes get 0% rather than 20%!
If you don’t believe me – it’s all here in the latest HMRC pensions newsletter!
One law for the poor
Members of pension schemes who get pension tax relief through the ‘net pay’ mechanism have their pension contributions deducted before Income Tax is applied to their pay, so only pay tax on what’s left. Pension tax relief on these contributions will continue to be given by default at members’ marginal rate of tax, including the new and newly increased Scottish rates.
One law for the rich
Relief at Source
If you are the administrator of a pension scheme using the relief at source mechanism, you will continue to claim tax relief at the rate of 20% for members who are Scottish taxpayers.
For pension scheme members who are Scottish taxpayers liable to income tax at no more than the Scottish starter rate of 19%, or who pay no tax, current tax rules will continue to apply. This means that scheme administrators will continue to claim relief at 20% in respect of these individuals, and HMRC will not recover the difference between the Scottish starter and Scottish basic rate.
And special treatment for the richer
Pension scheme members who are Scottish taxpayers liable to income tax at the Scottish intermediate rate of 21% will be entitled to claim the additional 1% relief due on some or all of their contributions above the 20% tax relief paid to their scheme administrators.
These pension scheme members will be able to claim the additional relief for 2018 to 2019 by contacting HMRC if they don’t already complete Self Assessment returns, or through their return if they do. HMRC will engage with stakeholders to help affected members claim this additional tax relief.
Pension scheme members who are Scottish taxpayers liable to Income Tax at the Scottish higher rate (41%) and Scottish top rate (46%) will be able to claim additional relief on their contributions up to their marginal rate of tax in the usual way, either in their Self Assessment tax return or if they don’t complete a tax return by contacting HMRC.
What kind of hypocrisy is this?
It is high-time HMRC was called for it’s pensions hypocrisy.
It is prepared to invent all kinds of special processes to accommodate the wealthy Scots , but is unprepared to help the poorest members of society who have – under auto-enrolment , been nudged into pension savings with the promise of a 4+3+1% contribution structure. If anyone is unaware, the employee is supposed to pay 4, the employer pays 3 and the Treasury pays 1% into the pension pot.
For hundreds of thousands of low-paid pension savers, (including a fair few Scots), the Treasury 1% simply won’t arrive.
That’s because under net pay, the tax-relief members get is in line with their marginal rate of tax – 0%. Meanwhile, the Scottish low-paid in Relief at Source schemes get more than basic rate tax relief! It’s barmy, it’s hypocritical and it’s just plain wrong.
Who runs these net pay schemes?
The vast majority of occupational pension schemes – including most master trusts (Peoples, Nest and Smart excluded) – still run net pay schemes.
They say that their systems won’t let them run under relief at source and they aren’t allowed to split schemes to run the low earners under RAS and the high earners under net pay.
So these schemes continue to offer immediate tax-relief through pay-code adjustments to their tax-paying members and nothing at all to those who are tax-exempt.
These large occupational schemes seem disinterested in this matter, as does the Pension and Lifetime Savings Association that ludicrously offers a Pension Quality Mark to net pay schemes.
I’ll continue to shout about it as the contribution problem gets worse
In April, Auto-enrolment contributions for employees treble, the following April they increase again from 3 to 5%. Actually that 5% should be 4% as the 1% “incentive” for the low paid should ease the burden. But no such luck in sight for low earners on net pay who will have to pay 100% of the increases!
An unfair taxation practice that’s about to get 5 times bigger!
HMRC is so powerful that few people want to speak out about this unfair taxation. I’m grateful to my contacts in payroll who pick up on these things and feed me the information. It would be good for the CIPP and CIPD to follow me in on this. I will be sending them this blog.
But the people who should be doing something about this are not the payroll bodies but the HMRC.
Come on HMRC, if you can tweak the system to reward the rich, you can do the same to help the poor.
If you don’t then you will rightly be called hypocrites, arguing that we pay our tax fairly, but giving all the tax-breaks to those with the deepest pockets.