In this article , I argue that all those identified by RTI as being short-changed by the net pay anomaly, should have an immediate payment in 2022 , based on current financial loss. Those affected are likely to suffer most from current inflationary pressures and should not have to wait till 2025 for an injustice that is happening today (and has been for the past 7 years).
On July 20th, the Treasury published draft legislation placing a duty on HMRC to make top-up payments to individuals who save into an occupational pension under net pay arrangements, if their total taxable income is below the personal allowance.
The legislation concedes an injustice to the low paid (mainly women) that has persisted for ten years. The impact on a low-earner’s take-home varies but could be as much as £170 pa The Treasury estimate that 1.32m people will be eligible for the first top-up payment in April 2025 of whom 1.2m are expected to claim.
First brought to the public’s attention through the Friends of Auto-Enrolment and the CIPP by Kate Upcraft in 2015, the net pay anomaly has repeatedly been ignored by HMRC. It was not until the Conservative Party included reviewing the problem in its 2019 manifesto, that any political party or trade union gave it attention.
Latterly , through the Net Pay Action group, headed by Ros Altmann and sponsored by the Low Income Taxpayers Group (LITR), pressure has been brought to bear to realise the campaign pledge. A consultative paper – outlining the HMRC’s proposed solution was launched and responses published in October 2021.
This legislation represents a considerable step-forward for who have campaigned for a return of a stealth tax that those who have paid its price, know little of. But it is a step towards justice, it is not justice.
The Treasury may think that having passed the draft legislation to compensate low earners for not getting promised pension saving incentives, that the net-pay anomaly is no more. But there are many who are from ready to accept the solution offered as either satisfactory or final.
The Government’s proposal is seen as unsatisfactory as it offers no -backdating before April 2024. The “top-up” will be no more than 10% of the overpayments some low earners have made to pensions since 2015
The money will not be paid to those impacted automatically , people will be asked to claim by submitting their bank account details to HMRC. After years of scams, many may be wary of doing that. HMRC expect 120,000 people not to claim, non-claimants may be higher unless there is strong publicity.
Meanwhile, throughout the cost of living crisis , that some believe will extend to 2024, HMRC will continue its current practice of allowing occupational schemes without a RAS capability to over deduct pension contributions by 25 p in the pound.
What compensation is provided in 2025, will be too little , too late and it may be too hard to claim for many of the 1.32 m people affected. We will never know how many people gave up on pensions because of this hidden over-payment, nor the impact on low-income households, the overpayments have made
So how did the net pay anomaly come about?
Originally , the lower earnings limit to be auto-enrolled was set at the lower limit you started paying tax. So back in 2012 -2015 only tax -payers were auto-enrolled. But from 2015 people started being enrolled whose earnings did not meet the personal allowance and this gap has increased ever since.
It’s meant that those non tax-payers contributing to occupational schemes – both DB and DC have had to meet the full cost of contributions , while those paying into GPPs and a select few master trusts such as People’s Pension and Nest, have got a 20% subsidy.
As the gap between the lower income threshold for auto-enrolment has fallen behind over the last decade, so more and more people found themselves in pension schemes where they did not qualify for the savings subsidy. It’s now estimated that over 1.3m of the 32m pension savers aren’t getting promised savings incentives – purely because they are in pension schemes that don’t offer “relief at source”.
Is the compensation fair and true?
In a word “no”. The compensation to be paid people in 2025 , only relates to over-payments of contributions in 2024-25. All of the over-payments over the previous ten years will not be compensated so for some longer term savers – compensation will be for one year in ten.
This appears both mean-spirited and fundamentally unfair. There is no carry-back or carry forward provision as has been available to those with higher rate tax-relief claims, those on low-incomes are being presented with a take it or leave it solution , which is scant compensation.
A proper settlement is required
All of which might not have been so important, had there not have been a cost of living crisis in 2022 , a crisis which looks like continuing to 2024.
The impact of falling into the net pay anomaly is that a £100 contribution into a pension costs £25 more than if it were made under relief at source. The impact is on take home and directly effects people’s capacity to pay food and heating bills.
Many campaigners including myself see a strong case for a one-off flat-rate payment made today – to all who have been impacted since 2015.