Whether you are saving to be wealthy or saving for your wage in retirement, you need to contribute to a pension plan.

Most people take the pension plan route to save because it comes out of pay and is hardly missed. One of the reasons it seems so painless is that you get tax relief on contributions at your highest rate of tax. If you with a smart boss you may get more through salary sacrifice (though less of that to come). Tax relief is an incentive to lock your money away to grow;- something that can make a real difference later on.

The first of two HMRC boosts to pensions is for low earners,

The unsaid pension windfall for low earners (LEPP)

What the budget failed to mention but is important is that 1 million low paid workers will be getting a bung from the HMRC for being in a net pay pension scheme

If you don’t pay tax but are in a pension scheme either through relief at source or in a short time by money rebated by HMRC to your bank account. This will be known as Low Earners Pension Payment (LEPP) and compensates those who don’t get relief at source. How little low payers understand tax and incentives  is obvious when you recognise that those in net pay pension schemes (all DB and quite a lot of DC workplace pensions) have been ripped off of their savings incentives since 2014.

The budget made no mention of this but I have it in writing from HMRC that in the next couple of months around a million low earners will get a simple form which will entitle them to a payment of up to £160 of back dated incentive (instead of tax relief). This will be similar to people in the poorer housing getting £100 early next year to meet rising energy costs. The difference is that while the £160 represents this year and the previous year’s incentive, it will come year after year at up to £80 a year.

The HMRC realise we all get scam letters and many of us find their scams of HMRC tax demands. They have gone as far as preparing communications to low earners that this is not a scam

For some reason the pension industry has been very quiet about this but it is important. It makes it easier for people on low incomes to stay in pension plans they’ve been auto-enrolled into.

I regret that no mention has been made of LEPP in this budget or any other and I hope that it will arrive with the kind of applause it needs. My regret is that the backdating is not to 2024 but to 2014 when the problem started. Watch out for this to burst in the next few weeks.

The second of HMRC pension boosts is for those who do pay tax.

Unless you are a pensioner and getting nothing but state pension , your tax allowances will not change. This is bad news for overall monthly cashflows as when we get paid we will pay more tax every time we get a pay rise. The increase in tax will not be matched by income tax thresholds

People who pay tax pay a lot of attention to it and when they move from one income tax band to another they find ways of mitigating the impact of the higher rate. Many people discover that they get pension tax relief at their highest rate which could be anything from 20% to 60% depending on your earnings.

The budget has done nothing about tax thresholds which get tougher each pay rise as you move up (I’ll ignore the “danger zone” for the moment).

What all this complicated income tax stuff leads to is a lot of studying of pension contributions by higher earners and it’s why the majority of pension contributions are made (per capita) by high earners.

I know this simplifies things but how pensions are benefited by this budget is by their importance as a way of avoiding income tax. Not only do pensions get tax relief on the way in but income from investments isn’t taxed and the likelihood of income on the retirement income is reduced by a quarter of your pot or (similar of your pension) being paid as a tax free lump sum. You pay tax on money from your pot or your pension at income tax rates depending your tax bracket then not now. “Then” means paying less income tax on what becomes for most people deferred pay.

To sum up

The HMRC – the collection agency of the Treasury of which John Healy is the ultimate boss, is going to be doing low earners a favour through a pension bung in the new year and they’re going to continue to let tax-payers, especially higher rate tax payers get enormous protection against income tax they otherwise would pay. They’ll get this protection by the Treasury and HMRC doing nothing to increase the tax bands.

So those who think this budget is going to be of no consequence to pension contributions should think of the positive impact to pensions of the hardship most of us tax payers will feel as we pay more tax as we go through the bands.