The House of Lords call for the UK government to “examine the process for payment of pensions tax relief” in a bid to assist low-paid workers in ‘net pay’ schemes that are losing out own tax relief, has been criticised amid concerns of a political ‘crossfire’ situation emerging.
Earlier this week, Department of Work and Pensions spokeswoman Baroness Buscombe said that the UK government now intends to “examine the process for payment of pensions tax relief”, speaking in response to concerns that low-paid workers in ‘net pay’ schemes are losing out.
However, with the call for an overall review AJ Bell has voiced concerns that the government might take the opportunity to bolt on some additional reforms and potentially “throw the baby out with the bath water”.
Tom Selby, pictured left, senior analyst at AJ Bell, said: “Low earning workers in net pay schemes are victims of an anomaly in the rules which means they miss out on the tax relief they are due.This is because tax relief is granted at a saver’s marginal rate of income tax. Where someone’s contribution is taken from their net pay and that pay is less than £11,850 (i.e. below the basic-rate tax threshold) they effectively get no tax relief at all.
“If the same saver was paying into a relief at source scheme, a 25% bonus would automatically be added by their provider.
Selby points that denying the lowest earning savers the tax relief they are due is “clearly wrong” and the government is right to consider solutions to deal with this specific problem. but by raising the issue of pension tax relief reform, Baroness Buscombe will “inevitably inflame concerns” more radical changes could be pursued.
“Given the £20 billion funding promise to the NHS made by the prime minister early this month, many now fear retirement savings incentives will be caught in the crossfire,” Selby added.
“While radical ideas such as introducing a flat-rate of tax relief for all have been backed by a number of commentators and think-tanks – and in theory could ensure those in net pay schemes don’t miss out – nobody has clearly articulated how such a system would work in practise.
“Given the sensitive stage we are currently at with automatic enrolment, it is essential any changes to pension tax relief are motivated by encouraging more people to save for retirement, rather than attempting to plug a funding hole in a different area of government spending.”