Unfair taxes for people working to stay off the breadline.

The consequences of the Government’s tax raid to sort out the NHS and pay for social pay are becoming clear. Here is the FT’s summary;

There were some winners from the policy. People receiving only pension income will not be affected by the changes. Landlords who have not incorporated into a company will also be left untouched, along with investors holding wealth generated from capital growth, as opposed to those receiving dividends.

Meanwhile, about 6.2m people earning less than £9,568 in 2021-22 will not have to pay the Health and Social Care Levy.

But for many — including about 29m people caught by the NICs increase — the new regime will mean a notable hit to the pocket, with the government itself warning the measures could have an impact on people just about managing to cope financially.

Just about managing to cope

Though it’s fallen out of fashion, “on the breadline” is graphic, it relates to those who would have to queue for food in lines in the USA and might today refer to food banks to which many working families have to go to eke out inadequate wages. The image at the top of this blog explains the inequity and unfairness such poverty brings.

Thanks to Gareth Morgan, you can model your  personal liability to the NI hike and subsequent “health levy”  whether self-employed, employed , married, disabled or as a pensioner , using this link.  (Enquiries to gmorgan@ferret.co.uk). 

For these low-earners, the net cost of contribution is 25% higher than it would be were they auto-enrolled into a relief at source scheme.People who earn above the minimum NI level but below the income tax personal allowance of £12,570 pay national insurance but not income tax. Many of these people are currently auto-enrolled into workplace pensions on a net-pay tax basis. This means they are paying the full contribution on their band earnings (from £6,240 upwards) and many will be enrolled into schemes requiring them to contribute against all their base pay.

For example

Jo earns £950 per month. Jo puts in £15 of her pay into her pension scheme every month. The pension scheme operates under net pay arrangements, so her employer deducts the pension contribution before calculating tax. This means Jo’s earnings are taken to be £935 for tax purposes instead of £950. However, as Jo’s earnings fall below the usual monthly threshold for paying income tax (£987.50), this reduction in taxable income makes no difference and she gets no tax relief on the contributions paid.

If Jo was in a relief at source scheme, her taxable employment income would be £950 a month. She would still not pay any tax, but she would only have to put 80% of £15 (i.e. £12) of her pay into her pension pot – the rest is paid into it for her by the government. She is therefore £3 a month, or £36 a year, better off under a relief at source scheme.

Now Jo will be finding themselves paying additional national insurance of 1.25% on earnings above the national insurance lower threshold. Her employer will also be paying 1.25% more to employ her. Her chances of getting a pay rise are receding as is her chance of making her pay match her bills.

For people on the breadline and just getting by, difference in take home of between £3-5pm matter a lot more than to the people making the policies in Whitehall. Civil servants and MPs are not worrying about the cost of net pay pensions but delighting in the prospect of a gold-plated Government Pension paid against decent salaries.

Lumping incremental pressure on the take home pay of those on low wages is both irresponsible and unfair. The Net Pay pension anomaly is an example of irresponsible and unfair tax treatment of those at the bottom of the income scale.

Time for Government to act on the Net Pay Pension anomaly

The Government has recognized that net-pay pensions are unfairly discriminating against a large group of low-earning pension savers.

It made a manifesto promise to fix the problem and issued a consultation in 2020 on way to do this. Several solutions (we are told) were put forward including one that I was involved with from the Low Income Tax Group, which looked pretty straightforward and was called the P800 solution. You can find details here.

HMRC has told LITR and the net pay anomaly group that they have found an even better solution but they have not told us or the country what it is. So every month, a large group of low earners continue to pay full pension contributions without getting the promised Government incentive of up to £5 each month.

The Government is not denying that the promise has been made, it is there in the universal formula 4% employee + 3% employer +1% Government incentive. Ironically, if you are a politician or civil servant , you can get the incentive paid on a personal pension contribution into an account you set up for your child.

An HMRC advert for how relief the Government incentive works.


Children don’t pay tax but they do get tax relief . That’s why the Government used to call this tax relief  “the Government Incentive” . They are now sufficiently embarrassed not to use that phrase, but it is still as relevant as when the incentive was introduced to promote  Stakeholder Pensions.

Action in the budget please.

Neither LITR or the net pay action group are fussed about what system the Government adopts to sort the net pay anomaly – so long as it is sorted properly.

We don’t understand what is wrong with the P800 approach but if there is a better one, we want that approach adopted asap.

Now , the people “just getting by” are going to be hit by higher national insurance rates, the problem becomes more acute and our voices need to get louder.

It is not enough for the Government to acknowledge the plight of the working poor, they have got to do what they can to alleviate suffering through poverty. Auto-enrolling this group into net pay schemes where they are unwittingly overpaying their contributions is unfair and irresponsible and the Government knows it.

It is costing the low paid £170 m a year, a tiny sum compared with the £36bn the NI and dividend increases will bring in over the next three years.

But that £170 m is coming out of the take home pay of people for whom the food bank looms.

We want the net pay anomaly sorted with a solution announced in this October’s budget.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , , . Bookmark the permalink.

2 Responses to Unfair taxes for people working to stay off the breadline.

  1. If you want to see the effects of the levy have a look at https://bit.ly/3zTyWbo . It’s my stab at a comparative calculator. Includes self-employed, employed, Scottish tax and pensioners.

  2. Pingback: The politics of personal pensions and pension freedoms | AgeWage: Making your money work as hard as you do

Leave a Reply