“Pension experts have expressed concern that people missing out may blame automatic enrolment”
I’ll be spending today at the Reward Strategy Payroll Autumn Update and tonight at the “Rewards”, where I’ll be dishing out a gong to someone great and good.
Steve Webb’s doing the payroll keynote at 10 am and I hope he acknowledges the part payroll has to play in Britain’s great pension policy success story.
But the day is packed with the information that payroll treats as business as usual but pension people know little about.
Occasionally , our worlds come together – the net pay scandal is one of them. I’m very proud that I could co-feature in this article with the CIPP’s Helen Hargreaves and that it’s published in Reward Strategy today,
The Net Pay Action Group (NPAG) calculate that this group contains around 1.7m people who have been missing out on pension benefits because of a loophole affecting people with net pay pension schemes. A future Conservative government would conduct a comprehensive review to fix the issue.
The problem has arisen because the automatic enrolment (AE) earnings threshold has remained at £10,0000, but the income tax threshold has nearly doubled since the start of AE to £12,500. NPAG reckons that AE accounts for the majority of people missing out.
Many pension experts, including Adrian Boulding, director of policy at NOW: Pensions, have expressed concern that when people find out they have been missing out they will blame AE – souring what is generally considered a government success story.
The problem may be bigger than the Conservatives reckon. Helen Hargreaves, associate director of policy, at the CIPP said that you can earn a lot less than £10,000 and still be caught in the loophole.
She added:
“Many low earners get enrolled when one period’s earnings spike above the pro-rated threshold. Once in, they stay in, little knowing they could be paying 25 percent more for their pension contributions than the same worker in the office next door”.
Not all workplace pension schemes work the same. Net pay schemes only pay tax incentives to the taxed, while relief at source schemes pay incentives to everyone. NEST pays incentives to everyone, Smart and NOW only to the taxed while People’s swings both ways.
Generally insurance companies pay incentives to everyone but there are exceptions, Legal & General offer two master trusts which use different ways of granting tax relief and incentives. On the other hand, traditional occupational schemes – including all government schemes, use net pay.
“NPAG welcomes the government focussing on this problem, a group of us led by Baroness Altmann – including the CIPP and several pension providers – have been lobbying the Treasury and Department for Work and Pensions for action on this and we’ve been rattling the cages of all the political parties. It’s great that after four years of trying, one has finally pledged to do something about it”.
Hargreaves was confident the problem could be fixed, quickly and easily. She said:
“We’ve been working with the Low Income Tax Reform Group and taken our work to the Office of Tax Simplification. Government has conceded that a P800 solution that rebates unpaid incentives to those impacted after a year-end sweep, could be coded and integrated into HMRC’s systems at am estimated cost of £10m. This seems a small price to pay for fixing a big issue”
While the size of any incentives would be unlikely to exceed £65 in any year, the numbers of people not getting what they were promised was increasing each year the AE earnings threshold stayed level and the income tax threshold went up.
The government has a chance of nipping this problem in the bud, but the intervention couldn’t have come a moment too soon, each month that goes by is making the problems caused by the net-pay anomaly – a little worse.
Good luck with trying to get the Treasury to do anything at present, especially where it means they would lose out on revenue.
The solution is rightly in payroll and in particular RTI. That was designed to place the control of tax relief on the employer through regular payroll but no-one is picking up on the solution to low earners should also be via RTI.
P800 is a cumbersome sledge hammer to crack a nut, it places the burden on the provider by storing up a year’s rebate to 000’s of pension members and then claiming it back – appalling bureaucracy taking the systems back 15 years.
The answer is as I have suggested for over 3 years, for a new tax code encoded in payroll systems allocated (switched on / off) on a payroll period basis to those whose earnings that period are below the trigger point and that they are either existing pension members or eligible that period and have not opted-out (since the last 3 year re-enrolment period). This is not complicated and these factors are just switches in the payroll.
Get the CIPP to test it out with some payroll providers.
The introduction of a new tax code shouldn’t require major legislation as it is just implementing what is already in the legislation allowing relief at source. The Treasury and HMRC are just dragging their feet saying it would not be economic – I don’t see economics in the legislation as an excuse they don’t have to carry out their statutory obligations
i applaud your optimism but my experience (and anecdotes from other employers) is that payroll providers do not get that operationally AE is, essentially, a payroll process and the quality of their software and internal skills/awareness of the requirements is worryingly lacking. I suspect a key reason that there aren’t more headlines around failure of process is due to employers plugging the payroll “dykes” and dealing with errors and failings so as to ensure the breach risks are minimised.
thanks for sharing
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