Campaigners welcome manifesto commitment on pension tax relief loophole
The Low Incomes Tax Reform Group (LITRG) has welcomed a commitment in the Conservative manifesto to ‘conduct a comprehensive review to look at how to fix’1 an injustice which means many low-income workers unfairly miss out on tax relief.
Members of relief at source pension schemes (RAS) who do not pay income tax, typically those earning less than £12,500 each year, are entitled to basic rate tax relief on pension contributions even though they pay no tax as they earn less than the personal allowance. However, this tax relief is not available for non-taxpayers in net pay arrangement schemes (NPA). This means that somebody in NPA, earning £12,500, paying the minimum contributions required under auto enrolment, is missing out on £64 in the current tax year as compared to someone in RAS.
LITRG has suggested a way of resolving the problem and has been working with pension industry bodies and others in a coalition – the Net Pay Action Group – to press for government action. Last month LITRG, on behalf of the coalition, wrote to the four largest UK parties encouraging them to put a commitment to addressing this unfairness in their manifestos.
Kelly Sizer, LITRG Senior Technical Manager, said:
“We welcome the Conservatives’ commitment to trying to fix this issue if they are returned to power. This follows positive responses from Labour and SNP spokespeople too in our discussions with them on this issue, as well as the Office for Tax Simplification highlighting this issue in a report last month.
“As things stand lower earners are in a pension lottery through no choice of their own.2 The issue affects those in net pay arrangements as opposed to relief at source arrangements, who earn less than or not much more than the personal allowance (currently £12,500). The issue means that it can cost 25 per cent more for someone in a net pay arrangement pension scheme to make the same overall pension contribution as someone in a relief at source arrangement. The large majority, around 75 per cent, of those impacted are women.
"We recognise that there are cost implications to putting net pay arrangement contributors on an equal footing with those using relief at source schemes, but the cost of extending tax relief to this lower paid group really pales into insignificance in the context of the overall sums involved in pension tax relief. Our understanding is that auto-enrolment was originally costed to provide this relief and so not only would a change make things fairer, it is what was originally intended. The Conservatives’ reference to those affected missing out because of a ‘loophole’ suggests they accept that this situation was unintended.
“A commitment to a review is not a guarantee that this loophole will be fixed, but it is a welcome statement nonetheless. We hope that whatever the result of next month’s election the new government will make resolving this obvious unfairness a priority. We look forward to engaging with them to achieve this.”
source: Low Incomes Tax Reform Group
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