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

1. to ensure consistency across all taxpayers for all aspects of the tax system in a timely fashion,
2. 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.

2025 update – (5 years on)

If you want to follow what happened next, then read this blog

You will note that it took the Treasury two years to sort out a solution to a problem we had solved for them. Please note Kate Upcraft kicked this all off in 2015 when we were still deep in implementing auto-enrolment.

For those averse to clicking my links, here is the announcement , now getting on for three years old of an unsatisfactory solution to be implemented in 2025. It will not now be implemented in 2025 but in 2026, 12 years after the problem started and 11 years after Kate Upcraft spotted it.

Treasury deprives the low paid of nine years of savings incentives – with a press release

After 7 years of campaigning that started when Kate Upcraft identified the problem for the Friends of Auto Enrolment, the Treasury has pulled the rabbit out of the hat , righted the wrongs and tried to cover itself in glory. “It has at least fulfilled on its promise to provide legislation that can be implemented in time for its leisurely timeframes , something that the Low Incomes Tax Reform Group acknowledge in their cautious welcome for  the amended rules”

In this blog, I comment on the press release that accompanies the new regulations published today.

The Treasury has not covered itself in glory. It has spent 7 years telling campaigners

1. That those who don’t pay tax – can’t get tax-relief (despite paying the equivalent of tax-relief to non tax payers in personal pensions that use relief at source) HMRC pays incentives to children of wealthy parents before they even go to school!
2. That it does not have a means to incorporate these changes into its systems (which seems to have been resolved by not backdating payments but allowing those who have missed out for the past 7 years to wait 3 more years for recompense , only one of which will be eligible for compensation).

It has been peddling these half-truths for so long that by the time they receive their first repayment they will have lost up to 9 years of their entitled incentives. One year’s compensation out of ten years missing out. This is 1/10 solution.

So what is the Treasury saying now?

The standard text is from HMT’s press release, my comments are in bold.

• 1.2 million low earners to see a boost to their take-home pay from 2025

Around 1.2 million low earners will receive top-ups to their take-home pay from 2025 which could be worth hundreds of pounds a year. Note how this is being woven into the cost of living agenda. The repayments won’t boost pensions – they will divert money from pensions back into take home pay. People will get one year’s repayments though they may have missed out for ten years!

Today the government has published legislation confirming that low earners who save through a Net Pay Arrangement (NPA) will get the same level of government top-up as those who use Relief at Source schemes. But will they? These top-ups will be considered earnings – with negative implications for universal credit payments – HMRC gives with one hand – takes with another

For NPAs, pension contributions are deducted before income tax is calculated, whereas with Relief at Source it is after.

1.2 million people are eligible for this pay boost – with 200,000 set to see a £100 increase in their take-home pay. The average beneficiary will receive an extra £53 a year. Information that is available in a press release today that the net pay action group has been denied for years.

75% of those to benefit are women, whilst 11% are based in the North-West and Merseyside and 12% are in London. Playing to the levelling up agenda…

Financial Secretary to the Treasury Lucy Frazer (in post since September 2021) said:

A quirk in our pensions tax system has meant that over a million low-earners have lost out on government top-ups to their pensions, resulting in comparatively less take home pay. (a quirk/anomaly that’s been known about for 7 years and results from complexities created by the Treasury – abetted by DWP)

We are correcting this injustice so low earners will get the same level of government support, no matter what type of pension they use. This injustice was created by a coalition government and perpetuated by a conservative government. It will be partially corrected, but not until we have another government in place. This solution has been extracted out of government with huge difficulty and is nothing for the Treasury to be proud of.

Since 2015, people saving through a Net Pay Arrangement (NPA) have had less take home pay compared to similar earning savers who use a Relief at Source scheme. This is because those using the latter type of pension scheme receive a 20% top-up from the government on their savings, whilst those using NPAs receive tax relief at their marginal rate – 0%. The Treasury here repeat their persistent trope that the RAS top-up is tax-relief – it is infact an incentive to save – which is why non-tax payers get the incentive. HMRC like to repeat that non tax-payers can’t receive tax-relief under NPA – as if the “incentive” didn’t apply. This is pure mendacity, the kind of thing that drives people to despair of ever understanding pensions. 

Today the government has published legislation confirming that it has rectified this anomaly (quirk),  as low earning pension savers will receive similar (but not the same as RAS top-ups aren’t considered earnings) top-ups regardless of what pension scheme they are using.

Beneficiaries will receive their top-ups directly into their bank accounts from 2025 and HMRC will be notifying those who are eligible then (there is still clarification as to whether low-earners  will have to claim the money – which is not the same as getting it – see Pension Credits). The net pay action group’s understanding is that claiming this money will an application process and the sharing of bank details with HMRC. Despite people’s pension contributions being taken by payroll, no payroll solution has been considered to ensure the money is returned.

The government has pledged to deliver these changes in full and on time and will ensure the complex nature of these IT changes are ready to deliver this wide-impacting change. The “in-full” assumes 100% take-up; this is highly unlikely unless the payment is automatic and paid by HMRC through payroll, universal credit or even pension credit. I would be interested to see HMT’s internal estimates of take-up of the benefit. This is of course not being shared in the press release.

In short!

This is as begrudging an acceptance of a cock-up as the Prime Minister’s resignation speech. Like that resignation , we will have to wait for rectification and the damage done will not be put right.

In claiming it is righting wrongs, the Treasury/HMRC is insulting the people who it has robbed, is robbing and will continue to rob for years to come. Margaret Snowden shares my annoyance at the Treasury’s approach, Here’s her response to fellow members of the Net Pay Action Group

.. the announcement made my blood boil!  We must be careful not to praise government for a solution that sounds like a teaser for a forthcoming election campaign. NPAG has fought hard to right this wrong and it has not been righted yet. The solution looks like some sleight of hand

While it is good that a solution has been found, it could and should have been found earlier .The size of the problem (which is now being used to show how generous is the solution) has never before been published – a glaring failure in public disclosure.

Government seems to think that it can present resolution of its mistakes as a major achievement. It cannot – it should be called out for its poor behavior and its pathetic attempts to spin its way out of an apology to the 1.2 million savers who have been short-changed on promised savings incentives.

The pension taxation system is quite biased enough against the low-paid and in particular women. It does not need the bias to be made worse by the failure of HMRC to put right a quirk it created.