This article forms part of AgeWage’s response to the Government’s call for evidence on the administration of pensions tax-relief . Here we look at the steps pension provider can and are taking to make consumers aware of the problems of overpaying pensions.
AgeWage is a company set up to help consumers better understand the pension policies they have established. It regards the consumers of pensions in this context as any person or organization who makes use of the generous incentives offered by the Treasury to improve retirement incomes. “Consumers” therefore include employers setting up workplace pensions under auto-enrolment and previously under voluntary arrangements- whether these be employer based contract schemes or trust based arrangements.
The consultation’s third question is
Are there ways through paying a bonus using RTI data that the following net-pay challenges could be solved? These challenges are
- to ensure consistency across all taxpayers for all aspects of the tax system in a timely fashion,
- while not creating additional burdens for scheme members and scheme administrators.
There is a way to sort out the problem and it is set out below. Our thanks to the low income tax-group for its articulation. The original of this document formed part of the Net Pay Action Group’s recent Budget submission
Our proposed solution requires HMRC to use the data they already collect via PAYE real-time information (RTI) to identify, after the year end, those who have contributed to an NPA scheme and who have not earned enough to qualify for tax relief. HMRC could then provide that tax relief via the informal P800 process (or those in Self Assessment could claim relief via their return).
This would result in a tax refund being issued, or that refund being offset against a tax liability.
HMRC already annually reconcile individuals’ PAYE data. While they collect information on contributions made by individuals to employers’ pension schemes through the RTI process, HMRC
do not currently include such data in that annual reconciliation.
Our proposal, simply, asks that they do.
Our proposed solution has the following benefits:
It will work for all individuals.
It is a dynamic solution, so that if a person’s situation changes (for example on a change of job, or increase/decrease in earnings), it will always work.
Similarly, it caters for people in multiple concurrent jobs.
The individual should not need to make a claim for relief, they would only need to check HMRC’s calculation.
It builds on HMRC’s existing processes and makes use of data they already hold.
HMRC are already working on plans to pre-populate individuals’ tax records with data they hold, so this solution is a logical part of those plans.
For people who do not need to complete a tax return, HMRC automatically reconcile their tax position at the year end, issuing a form P800 where the amount of tax paid by the employee is incorrect (with a demand for more tax or notification of a refund as appropriate). It would also be possible for HMRC to use ‘Simple Assessment’.
This is a statutory process (Taxes Management Act 1970, sections and may in fact be preferable to the informal P800 method; however, for the time being HMRC have paused its rollout
This mechanism could give automatic pension tax relief for higher earners in RAS schemes, and indeed 21% intermediate rate taxpayers in Scotland could be given the extra 1% relief automatically.
It could be programmed to cope with further devolution of tax rates, for example with Welsh income tax, thus future-proofing the system.
The proposed solution places the NPA contributor in a comparable position to the RAS contributor.
There is a manageable complication for those claiming universal credit. Those individuals receiving a tax refund must declare it to the Department for Work and Pensions (DWP) for inclusion in their
income calculation for the period in which it is received. The NPA contributor therefore sees an adjustment to their universal credit claim at a later point than the RAS contributor. The process of
making such adjustments could be smoothed by HMRC passing tax refund data to the DWP in real time for universal credit claimants.
The NPAG has considered whether tax refunds generated by the proposal might be paid directly to the pension scheme rather than to the individual. This was agreed to be complex to administer and
would not result in equalising the position between NPA and RAS scheme members, nor reimburse the member for the extra payments they have made.
For detailed notes, please refer to the NPAG budget submission on the link.
We are of the view of the Net Pay Action Group (of which AgeWage is a member) that the solution devised by the Low Income Tax Reform Group and articulated above, is the solution that HMRC should adopt to resolve the net pay anomaly.
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Again I don’t think this solution is workable.
1 First, it is not fair to ask the low earners to wait a year before their tax relief / incentive is available
2. Second, if there is a delay then the investment would not be within the Statutory timescale under AE rules
2. Third, if the providers apply the incentive monthly to the contributions and then claim back annually why should providers provide the cash flow for HMRC
3. Fourth, the administration of annual rebates, balancing Universal Cridet retrospectively is another level of bureaucracy thus adding to the HMRC overload and the estimated 1.7m people affected by the inniquitous tax treatment
If the rebate / incentive is applied via the monthly RTI submission then
1. Employees will receive the incentive at the right time.
2. The investment timing will meet AE regulations
3. There would be no additional burden on HMRC
4. The payroll systems upgrade would be a once and for all project and future tax rates and persoanl allowances would not affect the process
5. There would be no affect on Unversal Credit or any other benefits as the employee’s pay would not be affected