Pensions levelling up measure for low earners needs to be fairer, faster, and more effective, says LITRG

The letter follows LITRG’s response¹ to consultation on the draft legislation to implement the top-up payments, which raised concerns about the detail and the 2025 implementation date.

LITRG’s letter to the FST (reproduced below) is supported by named members of the Net Pay Action Group – policy experts, pensions industry representatives, payroll specialists and others – who have been working together on this issue for around five years. 

Kelly Sizer, Senior Manager for LITRG, said:

“We broadly welcomed² the Government’s publication of draft legislation for inclusion in Finance Bill 2022/23 with the intention of resolving the longstanding anomaly of an estimated 1.5million low-income workers (three-quarters of whom are women) missing out on government incentives towards their pension savings.  

“As we want these proposals to work as effectively as possible, we are making a number of suggestions to the Government for improvements to the legislation and its implementation. We very much hope to see our suggestions incorporated into the draft when the full Bill is published in the spring.

“Under current plans, this legislation is not due to take effect until the 2024/25 tax year, with the first payments not being made until 2025/26. We urge the Government to reconsider this schedule in light of the cost of living crisis. There is significant concern that low-income workers looking to cut costs in the short term will consider opting out of pension savings to their longer-term detriment. Accelerating the implementation of the proposed top-up payments could help to prevent this.”

Notes for editors

1. ​LITRG’s response to the draft Finance Bill clause can be found here.
2. See LITRG’s press release 21 July 2022.

Full text of LITRG’s letter to the Minister

Andrew Griffith MP
Financial Secretary to the Treasury and City Minister

Dear Minister,

Pensions tax relief for low earners

We are writing to you as Minister responsible for pensions tax policy.

We are members of the Net Pay Action Group. The Group consists of pension providers, lawyers, tax specialists, payroll specialists, employers, consumer groups and policy experts. We are united by a collective concern that non-taxpayers saving into net pay pension schemes are losing out financially as compared to those saving into relief at source schemes. We welcomed the commitment in the 2019 Conservative manifesto to address this anomaly, and the carrying out of a call for evidence on this area of policy the following year.

As you may be aware, this call for evidence led to draft Finance Bill 2022/23 legislation over the summer, to put in place ‘top-up payments’ for low earners contributing to net pay basis pensions. While we welcome the fact that the Government are legislating in this area, we do have some concerns about the proposals, which are sufficiently significant to raise them at a ministerial level.

1. Proposed treatment of the payments as earnings 
   We think that some recipients of the top-up payments could be left in a better position than those paying into relief at source pensions as a result of treating the payments as employed earnings for income tax purposes. We suggest that the payments should instead be deemed to be tax refunds, which we believe would avoid this and other practical complexities.
    
2. Welfare benefits interactions
   There is an apparent mismatch between the way in which the DWP treats pension contributions when calculating earnings for universal credit in practice and the wording of the Universal Credit Regulations. We request that HMRC and DWP look at our concerns in this area and work together on implementation to ensure that universal credit claims are automatically adjusted for top-up payments.
    
3. The mechanics of making the payments
   The draft legislation puts the onus on HMRC to make the top-up payments. While this is welcome, we believe that ‘failsafe’ clauses should also be included, allowing an individual to:
   1. ​​make a claim where HMRC have not proactively made a top-up payment; and
   2. appeal an HMRC decision not to make such a payment.
       
4. Implementation date
   Finally, we reiterate our disappointment that low earners will not see any benefit from these proposals until 2025. The current cost of living crisis only emphasises the arguments in favour of accelerating implementation of top-up payments and backdating them further than the 2024/25 tax year. Such acceleration could prevent low-income workers from opting out of pension saving due to rising costs of living. Further, additional backdating could help boost take up of the payments, as a larger initial sum on offer would present a greater incentive to respond to HMRC’s correspondence.

We therefore urge the government to reconsider the implementation timetable.

Given the timing of this legislation we hope you will give these concerns your urgent attention. As stated above we are supportive of the Government’s intention to act to remedy this unfair anomaly. Our interest in writing this letter is to make the remedy fairer, faster and more effective.

These concerns are set out in more detail in the response of the Low Incomes Tax Reform Group (LITRG) to the draft legislation. We would be very happy to meet you and your officials to explain them further and to help identify practical ways forward.

Yours sincerely

Paddy Millard MBE, MA (Oxon), LTCL, CTA (Hon. Fellow)
On behalf of the Net Pay Action Group

NPAG members supporting this letter are:
Low Incomes Tax Reform Group (part of the Chartered Institute of Taxation), PASA, Adrian Boulding, CIPP, Henry Tapper (AgeWage Ltd), Ruston Smith, TISA, Darren Philp, NOW: Pensions