Pension paralysis over the net-pay rip off.


I won’t bore you with a list, but there are 31 blogs on this site dealing with various aspects of the net-pay rip-off which is denying hundreds of thousands of low-paid people the incentive promised them by HMRC for contributing into workplace pensions.

It is a scandal, the pensions industry are complicit in allowing it to become one and this blog explains why the situation has got to the state it has. It also gives some hints to employers who don’t want to be a party to yet another pension scam.

I’m writing this article because net-pay has finally become topical. It’s become topical because a pension consultancy (Hymans Robertson) has launched a report on the matter which has sufficient PR behind it to get it media prominence. Good for Hymans Robertson, they are part of the solution, but why has it taken them and others  3 years to wake up?

How did we get here?

Around October 2015, payroll experts, notably Kate Upcraft, noticed that the lower threshold for auto-enrolment contribution and the minimum threshold for income tax were diverging so that some people could be paying no tax , getting no tax relief and yet being auto-enrolled.

As Kate and I and a few others looked further, we realised that a lot of auto-enrolment was starting at £1 of earnings (this is what happens at the House of Fraser). This means that all low-earners in net pay auto-enrolment schemes, could be missing out on incentives to contribution. Then remember that many people on habitual low-earnings “spike” into auto-enrolment – as a result of a well-paid pay period and you realise that auto-enrolment’s 11m new participants , include a few hundred thousand who get no incentive to contribute – just because their employer is operating net-pay rather than RAS.

From my emails that Kate Upcraft first had a meeting with the DWP about this in November 2015, and NOW Pensions and my blog were flagging all this from mid September 2015. Kate first discussed this with me in July 2015.

It is very hard to know how many people are contributing to DC schemes under net pay and missing the incentive. Many are doing so under salary sacrifice and are completely off the radar. Lloyds Banking Group reckon that they may have as many as 3000 such employees on their own. Since the vast majority of own occupation occupational schemes are set up under net-pay and as many of them (for instance Whitbread) have high numbers of low-earning, part-timers, I think our initial estimate of 300,000 people in the “rip-off”, should be revised upwards.

Over the past 3 years, despite my blogs, Ros Altmann’s blogs and the pleading of parts of the payroll industry (Kate Upcraft in particular), nothing has happened. OK Now has cobbled together a fly-by-wire compensation structure, but other than that NOTHING HAS HAPPENED!


Nothing has happened because virtually all the players in this sorry fiasco , have blood on their hands.

Chief culprits are the consultants, who both recommended employers set up net-pay arrangements (which suit the high-earning purchasers very well) and administer them on systems which are “net-pay only”.

These consultants – especially the big three – Mercer, WTW and Aon, have now gone further and set up their master-trusts under net pay. That means that they are so steeped in net-pay themselves that they can say nothing on the subject. No advice- no action, the large employers sail on ignoring their low-earning members and no-one, not the PMI or PLSA or AMNT or any other trade body does a thing about it.

Now let’s look at the employers. Quite apart from feeling they are absolved by their consultants, they have no wish to deal with this issue on any commercial grounds. The staff who are missing out are their least valued, they are probably more mobile than senior staff but even if they aren’t they have no voice. They have no voice because their normal representatives – the unions – are making no noise.

I do not know why the unions are not bothered about this issue. Perhaps it is because this is DC, perhaps because of phasing, the scale of the problem is currently too small, perhaps because one of the unions has a 50% share in a net-pay mastertrust. Anyway, the unions have generally been quiet on this issue and that has let the employers and their advisers off the hook.

All of which is leading up to the great big villain of the piece – the Government – more especially HMRC – who see Net Pay as a handy way of avoiding the impact of auto-enrolment on tax inflows. Having a high number of low-earners outside of the RAS system is just fine by HMRC, and as the low-earners are not even being told they are being ripped off, this situation can go on bubbling away – just like PPI.

Just like PPI!

Of course we all know what happens when the PPI bubble bursts. You get hundreds of thousands of claimants downloading forms from Money Saving Expert and demanding expensive to administer compensation for being ripped off.

Which is exactly where HMRC is heading.

And even if employers and unions aren’t directly in the line of fire, they will find themselves with the same collateral damage as all those who condoned PPI find themselves with.

This is another version of the “too big to fail” problem. The PLSA, PMI, Consultants, Employers, Unions and most of all HMRC really do believe that they can keep a lid on the Net Pay scandal, because it is so big that no-one will have enough energy to lift the lid on it.

Well done Hymans Robertson (and a few others)

It may have escaped notice, but there are consultants who don’t run their own master trusts and who are prepared to stand up and be counted – even if it means pissing off some of their clients. Hymans Robertson are the biggest, Lane Clark Peacock are another and First Actuarial are a (smaller) third. Apart from us and a gaggle of smaller consultancies  too numerous to mention – (oh and JLT), all the other pension consultancies run their own net pay master trusts and they all do their own administration. JLT of course administer NOW Pensions master trust – and they can’t offer NOW a relief at source solution.

Of course we do have our own vested interests and by writing about net-pay I will undoubtedly piss off some of our clients and introducers. But we really do need to solve this problem and as an industry – put pressure on HMRC to find a proper solution. So long as most of the stakeholders in this debate remain conflicted and stay silent – that will not happen.

Possible solutions

Because NEST is a relief at source scheme, many large employers have put in place a NEST scheme for low-earners and the problem (for them) is mainly solved. I know of at least one large employer with their own occupational DC arrangement (net-pay) considering a GPP for low-earners.

I have seen (from Kate Upcraft) various solutions that could be administered by HMRC , which would compensate those on net pay without incentives, through “year end sweeps”.

And I know that some workplace pensions operating under Net Pay (Smart for instance) are promising to offer Relief at Source within a few months.

People’s Pension of course has the best solution which is to offer both forms of relief(though not within one employer arrangement).

All of these solutions are pro-tem till HMRC gets its act together. HMRC were the bright lads who introduced Relief At Source and HMRC should have it in them to provide us with the long-term solution. I don’t know what the long-term solution looks like but we cannot go on like this!

In conclusion

So rather than right another 32 blogs about net-pay, I hope that others apart from Hymans Robertson , will do it for me. I hope that the PLSA and PMI and other bodies will start lobbying HMRC for fairness for those on low-earning and I really hope that we will have – in quick time- a solution that ensures that a large part of the newly phased contribution increases of those on minimum auto-enrolment contributions, are given what the Government has promised them – an incentive equivalent to basic rate tax-relief – WHETHER THEY PAY TAX OR NOT!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Pension paralysis over the net-pay rip off.

  1. Malcolm Delahaye says:

    It’s the fact that the Government tried to mislead investors by suggesting they paid into an employee’s pension pot that has caused the problem. Just because it looks like HMRC pay into the pension pot doesn’t make it fact.

    RAS exists only because pensions tax relief was in the past conceded to private pension policies to replace life assurance premium relief. Prior to that only contributions deducted through PAYE under occupational schemes were allowed to be relieved of tax.

    RAS is no more HMRC paying into the pension pot than is net pay. The payment from HMRC subsidises the cost to the contributor and the financial impact is only on take home pay, not the amoiunt invested.

    So confused are the authorities that tPR publish web material stating that a non-tax payer under net pay has to contribute more to get the same pension as under RAS. Utter garbage. NOT TRUE – HMRC subsidise the cost by not taxing earnings passed across as a contribution. The illusion is simply the mechanics of getting RAS tax relief taken off earnings where PAYE tables are not used.

    The bizarre concept of a non-taxpayer being ripped off by not getting relief from tax they do not pay in the first place has always confused me. It is an anomoly which arose as a result of encouraging low earners under Stakeholder where the link between tax relief and tax liability was broken. The result for non-tax payers was a tax credit that increases pay by subsidising the cost, it is NOT tax relief and NOT a payment into a pension pot.

    Imagine if basic rate tax relief was reduced from 20% to 18%. The authroities would now have to explain to tax payers that they were reducing the amount HMRC “pay into your pension pot” and that employees will only get a 78% reduction in their pension contribution. Had an honest picture been presented in the first place no one would need to be told that as their tax liability had reduced so had the value of tax relief and they would now bear 82% of the pension cost, not 80%.

    RAS is an inefficeint and more expensive way of providing tax relief and many higher rate tax payers haven’t got a clue they can claim more relief. Net pay is simple and is the default means of giving tax relief. Instead of employers and schemes having to use RAS to avoid the anoomoly created by poloiticians, it would be cheaper to pay the difference in pay. The maximum loss to a low earner iunder net pay is £8 per annum, a loss incurred in take home pay. The amount invested, (in case some still labour under the misapprehension), is EXACTLY the same whether you are subject to RAS or net pay.

    We happen to offer both RAS and net pay, but the value of the offering in my view is marginal and compared to the anomoly between the nominal charges borne by small pension pots compared to large pension pots is a minor anomoly. Low earners with small pension pots are subsidised by perhaps £30 a year if you compare annual unit costs per member and the corresponding revenue derived from AMC charges.

    So I don’t share the passion for raising the flag for RAS, far better to remove the anomoly and give an illogical tax credit under net pay.

  2. Bob Ward DipPFS says:

    At last, I hope the momentum is now building. As you say Henry, shame on all the mandarins sitting quiet wringing their hands because they haven’t had to rebate tax relief – to the very people who need it most; shame on George Osborn for causing the current situation and shame on Philip Hammond not correcting the issue, and shame on the ‘been and gone’ pension ministers who side-stepped the issue when they were in office and now raise it like some bolt of enlightenment.
    How many times have I responded to articles about the tax non-relief and even written articles to Professional Pensions (who don’t think me worthy of print)
    A simple solution is via RTI with the offset being deducted from the employer’s submission and paid into the employee’s pension plan. All that is need is a ledger code for payroll systems to pick up those below the threshold and drop the tax relief into the pension contribution ledger
    Wake up everyone and lobby more. I repeat again, this is not a pension provider problem it was caused by the Chancellor (and those who drew up the rules in the first instance using separate trigger points and earnings thresholds – a disaster waiting to happen. Failing that has someone got the guts to start a class action for pension mis-selling. People were promised tax relief, no if’s or but’s, when auto enrolment was launched by DWP and now it has been taken away

  3. Neil Walsh says:

    Hi Henry – you’re right to have raised this so often. Just to say that it is definitely a big issue for trade unions. Prospect has written to the relevant ministers at Treasury about this a number of times over the years. We will have a session about the gender pension gap at our national conference this year and this will include guidance for reps and negotiators on what they can do to help members affected. I’ve heard other trade unions report back about their efforts in relation to this issue at TUC meetings.

    On the wider point I’m afraid I am increasingly pessimistic about HMRC resolving this. When Prospect first wrote to Treasury the reply was that it would be dealt with as part of the review of pension tax relief, then DWP were to look at it as part of the review of automatic enrolment, most recently there was a non specific statement about consulting industry in the future. We seem to be further away from a solution than ever.

  4. Mike says:

    I’ve been raising this issue for some years but without the exposure that Henry has! Its also a potential sex discrimination case as most part time / lower waged employees are female.

    I do know that Ros Altmann has recently raised this issue as well.

  5. henry tapper says:

    Mike – I’m glad you have and I hope your voice gets heard.

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