I enjoyed researching the answer to this one. Next year over 1 million low earners should get a letter from HMRC offering them free money – and it’s legit! https://t.co/Q2tTPH5JIJ
— Steve Webb (@stevewebb1) July 1, 2024
I am really pleased to see Steve Webb properly answering this question.
The Government has introduced a new pension top-up scheme for people on low income.
People earning less than the personal allowance of £12,570 do not get tax relief on pension contributions.
The new scheme will pay the tax relief into the bank accounts. Could you please explain how the scheme works?
I suspect that the person asking the question is rather better informed than most of the pension experts who I know, who have ignored the issue of “value for money” for low earning savers overpaying their AE contributions by 25%.
The biggest constituency, as I discussed with Sir Steve last week are savers accruing in the NHS and other public service pension schemes. The senior consultants upset about high marginal rates of tax when they exceed the annual allowance should spare a thought for part-time orderlies and medical staff who since 2014 have been denied their promised savings incentive because they pay no tax. Many of those consultants will have taken advantage of the relief at source loophole that enables their children to get these incentives on contributions made by parents through “relief at source”.
Despite high earners exploiting RAS, the majority of Daily Mail readers consider the payment of the same incentives to the genuinely low-waged an outrage
Such iniquities spring from the gap between the lower income tax threshold (£12,750) and the auto-enrolment contribution threshold (£10,000) earnings in this gap only get incentivised under RAS. Some workplace pensions offer both RAS and Net Pay in one scheme. These include People’s Pension and (now) Smart. Legal & General offer separate schemes for low and high earners (the former uses RAS and the latter net pay). Nest uses RAS as will presumably NOW when it moves to the same operating system as Nest but the rest of the master trusts including Cushon, operate net pay schemes which discriminate against low earners. Almost all single employer occupational pension schemes , including all the DB schemes, operated net pay.
The journey to get incentives due but not paid to be refunded to savers has been nearly a decade in the travelling. The Net Pay Action Group, which has included net pay providers, activists and the very fine Low Income Tax Group (LITG) has been led by Ros Altmann and had two big wins. In 2019 it got a promise in the Conservative Manifesto to find a solution to the problem and in 2022 it got an agreement with the HMRC to repay the incentives to impacted pension savers. The refund will ignore all losses till April 2024 and will start paying out in the summer of 2025. Steve Webb picks up the story
The way the scheme will work is that at the end of 2024/25, HMRC will look at membership information from pension schemes which deliver tax relief through the Net Pay Arrangement.
It will identify workers who earn under the tax threshold (or only slightly above) and who made personal contributions into the scheme.
HMRC will then write out to them asking for bank details and will make a payment directly into their bank account (not into their pension).
The size of the payment will simply be the income tax due on the pension contribution.
So, for example, if someone has paid £500 into an occupational pension using the Net Pay Arrangement, HMRC will credit £100 into their bank account.
This means that they will end up with £500 in their pension but at a net cost of £400, the same as someone in a RAS scheme.
Smart readers will have spotted that the numbers of savers who apply for this freebie will depend on
- People’s awareness of the opportunity; Sir Steve will doubtless be working with Martin Lewis to raise this.
- The promotion of the scheme by HMRC
- People being able to distinguish between this offer from HMRC and those of con-artists.
The irony of the net pay arrangement is that it represents the fulfillment of a Conservative promise which will provide tangible benefit to low earners. Meanwhile the largely fake savings surrounding the Triple Lock Plus initiative are stealing the limelight.
Labour will benefit from the bung, the Conservatives will never see implementation of the quadruple lock which will be remembered only by the most ardent pension geek.
The pension industry , other than those who supported the net pay action group, have not covered themselves with glory. Only now are the big master trusts getting round to adapting their systems , too late to recover the money lost by low earners since 2014.
It is a sad indictment of the experts I work with, that so few have considered value for money in terms of contribution efficiency . It is particularly sad to have seen so little interest in this issue by trade unions.
Perhaps they are more concerned getting in extracting more money into the pension system , than ensuring that poorer savers are properly incentivised.
It will be interesting to see how this plays out next year.
uneasy bedfellows
