Last Thursday, there was another meeting of the group of us, determined to keep up pressure to sort the problem of net-pay pension contributions this side of auto-enrolment’s next big phasing hike in April.
Just to rehearse the problem, if you are low-paid and in a net-pay pension scheme, your pension contributions could be 25% more expensive to you than if you are in a scheme where contributions get relief at source.
More than 1m people are expected to fall into this category and it could mean you paying more than £5pm to be in your pension. That may not sound a lot is you are full time and on a typical wage paid in the financial services industry but it is a significant extra cost for those on low earnings.
The discount on pension contributions was originally branded the “Government Incentive” to those not paying tax. That changed in 2015 when Government dropped the 4 +3 +1 approach to auto-enrolment – because it recognised that many would not get the “+1”. One of the reasons for this was the gap that was emerging between the minimum threshold for auto-enrolment (£10,000 from April 2019) and the minimum threshold for paying income tax – (£12,500 from April 2019). If in any tax year or any pay period in that tax year, your earnings exceed the pro-rated minimum threshold for auto-enrolment – you will be enrolled.
The discount was designed to ensure that the tax-system – which gives up to 45% off pension contributions for high-earners – gave back to the poorest savers. Net pay is financial inclusion in action and it’s working very well for most low earners
For instance , the incentive is paid out to members of occupational pension schemes like NEST and People’s Pension – which operate relief at source, as well aa to contract based personal pensions run by insurance companies and SIPP providers.
But it isn’t paid to you if you are in the vast majority of occupational schemes, that – mainly for administrative reasons, can’t afford to switch from net pay to relief at source. You don’t choose your job on the basis of the pension contribution structure it offers.
So whether you get the incentive or not is now a total lottery, it all depends on what type of scheme you are in.
It’s not right that over 1m people will not be getting their incentive in 2019 and the campaign group is led by Ros Altmann and includes Adrian Boulding of NOW and a number of organisations keen to right the wrong.
Some enlightened employers have recognised that if they run an occupational pension scheme that discriminates against the low-paid, then not only are you running the scheme inefficiently (by not picking up the free money from HMRC),.
This Thursday we heard an excellent presentation from Tesco, who alongside their pension partner, Legal & General, have created a system that means that everyone maximises out the tax advantages of pensions available to them as individuals. Higher earners can get their higher rate tax-relief paid to them up-front through salary sacrifice, while lower earners get their incentive through relief at source. There are complex triggers in place at payroll to make sure that those on low earnings don’t lose out from salary sacrifice (or that Tesco doesn’t accidentally pay them a nominal salary below the minimum wage.
This complex system can be put in place at Tesco because it has a workforce of 300,000 that makes it worth designing a bespoke solution. Tesco employs some of the best brains in Britain to make sure that everyone gets the right deal for them and this has meant a lot of bespoke coding of systems – especially around auto-enrolment and salary sacrifice.
Tesco’s pioneering approach could be adopted by other large employers with a large number of employees working part time and/or on minimum wages. It means disruption and expense but Tesco reckoned that it could bear that cost rather than see unfair discrimination against its low paid staff (the majority of whom are women).
But not every employer is a Tesco
What became obvious during the presentation , is that Tesco are at the top-end of good practice, they are in the right place. Many smaller employers do not have the resource to implement the system of triggers described to us by Tesco. Complex benefit structures aren’t cheap to design or implement.
This is the reason for the title of this blog. There is no solution to the net pay problem other than for HMRC to take the bull by the horns and create the coding that gives employees the incentives they have earned in a pay coding adjustment. The group is currently putting the final proofing on a proposal that will be re-submitted to HMRC which explains how this will work.
Practical steps to help Government out of the problem
Now is a particularly good time to approach Government as HMRC has already committed to making pay-coding adjustments to Scottish people paying income tax at the Scottish rates. We argue that if HMRC can do it for the Scots, they can do it for all UK tax-payers.
It may be that HMRC can do things by halves, which would make the bill more palatable for them. A very high number of those affected by the net-pay anomaly are in Government pension schemes. These could be carved out of any settlement and dealt with by separate negotiation.
It is no good pretending this problem isn’t here. It’s a big problem today and will get a lot bigger in April. It is no good Government departments passing the buck, the DWP and Treasury both have skin in the game and should both be involved in discussions on how to fix things.
The long-term impact of the net-pay anomaly are
- the low paid may get priced out of auto-enrolment
- the low paid will remain enrolled but not be able to afford to live properly
- the low paid will be mobilised, either by private organisation or by some future Government to demand what they were promised and couldn’t get
Right now, the Government seem to have put this problem in the “too-hard” box and it seems that most employers running net-pay schemes have followed suit.
Well done Tesco for looking at this problem and putting in place a bespoke solution.
Come on HMRC, we are not all Tescos, you cannot rely on the private sector to get yourself out of this hole, you need to do some work on the net-pay anomaly right now.