Pensions measure to help low earners could miss the mark, LITRG warns MPs

The measure, which appears in the Finance Bill² currently going through Parliament, tries to address a longstanding pensions inequality impacting low earners. Its introduction follows five years of campaigning by LITRG and others³. The issue arises because workers contributing to ‘net pay arrangement’ workplace pensions do not get tax relief on some or all of their pension contributions if their income falls below the personal allowance. By contrast, if their employer chooses to operate a relief at source scheme, the worker obtains tax relief via a separate mechanism, even if they are a non-taxpayer.

The government recognised this as an anomaly needing a ‘fix’ in the 2019 Conservative election manifesto, and aims to address the unfairness by introducing ‘top-up payments’ to people who are saving under a ‘net pay’ pension scheme, where their low income means they are not already obtaining relief. These top-up payments will be treated as taxable employment income in the hands of the recipient.

However, the government’s own policy costings indicate that in the first year of the new relief (2025-26, when payments will be made in respect of the 2024-25 tax year), the cost is expected to be just £10million. By LITRG’s estimation this indicates an anticipated take-up for the new relief of barely a quarter of the eligible population. The group is urging the government to set its sights higher, with an effective awareness-raising campaign and beginning the new relief a year earlier, which as well as providing a resolution to the inequality sooner, would be expected to boost take-up.

Kelly Sizer, Senior Manager at LITRG explained:

“While we are very pleased that this longstanding inequality faced by around 1.2 million lower income workers – of which around 75% are thought to be women – is finally being addressed, we have been left disappointed by the delay in implementing the new rules. We are calling on the government to bring forward the effective date from April 2024 to April 2023. Some of the pension savers who have been affected by this issue have been losing out under the current rules since 2015 or earlier. Waiting another year for the issue to be resolved seems unfair and unnecessary.

“Providing an initial payment for at least two tax years could also encourage more people to respond to HMRC’s invitation to sign up for the relief. As things stand, we are extremely concerned about what the level of take-up will be. The government’s own projections suggest they don’t think it will be much higher than one in four of those eligible, at least in the first year. This would be shockingly low.

“The communication of this new relief is also crucial. The government must launch a collaborative publicity campaign – in conjunction with the pensions industry, employers, payroll industry and other organisations – so that low earners are aware of their entitlement under the new rules. This is particularly important in the current climate where the public is encouraged, quite rightly, to be cautious given the proliferation of fraudulent activity related to tax repayments. Pension savers will need to understand the correct process to benefit from the new rules.”  

LITRG sets out its concerns in a briefing being provided to MPs ahead of committee stage debate on the measure, which is scheduled for 19 April.

In their briefing, LITRG also propose:

• People should be able to initiate a claim for a payment if they think they are eligible, even if HMRC’s software has not automatically identified them as eligible, and they should be able to challenge the level of a claim.⁴
• The government should clarify how HMRC will assess someone’s total income in relation to a claim.⁵
• HMRC should not be able to claw back payments if HMRC’s total income figure is wrong.
• The payments should be treated as tax refunds rather than (taxable) employed earnings.⁶
• ​HMRC should be obliged to notify the DWP of payments made to universal credit claimants.

Notes for editors

1. See LITRG’s briefing for MPs.
2. The Finance (No 2) Bill 2022-23 was published on 15 March 2023. Clause 25 contains the proposals for top-up payments to be made to those pension savers in net pay pension arrangements where their total income is below the personal allowance.
3. The campaign has been a collaborative effort by the Net Pay Action Group (NPAG). Member of NPAG are: LITRG, Baroness Ros Altmann, The Chartered Institute of Payroll Professionals, AgeWage, NOW: Pensions, The People’s Pension, Pension and Lifetime Savings Association, The Investing and Saving Alliance, Association of British Insurers, Trades Union Congress, Age UK, Royal London, Smart Pension, The Pensions Administration Standards Association, Legal & General Investment Management, Ruston Smith.
4. Clause 25 provides that HMRC are to identify those entitled to a top-up payment and calculate the appropriate amount. There is no suggestion that the individual will have any recourse if they disagree with HMRC’s calculation, or if HMRC fails to offer a top-up payment in circumstances where the individual might expect one to be due.
5. Draft legislation published last summer said that the calculation of any top-up payment would be based on employment income only – this is a far easier figure for HMRC to readily assess due to payroll submissions made under Real Time Information. Clause 25 has changed the calculation to be based on total income; a figure far more difficult for HMRC to assess without input from the individual.
6. In a submission in response to last summer’s draft legislation, LITRG had reiterated its longstanding proposal that the top-up payments should be treated as tax refunds, which would put recipients in a more comparable position with those saving into ‘relief at source’ pension schemes. Clause 25 instead treats the payments as taxable employment income, which is likely to give rise to odd circularities in a person’s tax position for the year.