Pensions: Don’t duck big decisions

Ducks in a row
Kate Upcraft
Kate Upcraft Consultancy Ltd
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Problems and traps still abound with auto-enrolment for the lower paid, and tax relief for pension contributions.

Auto-enrolment dates

Any employees who had turned down membership of a defined benefit (also known as final salary) pension scheme ahead of their employer’s staging date for auto- enrolment were put into ‘transition’ until 30th September 2017. These employees must be auto-enrolled from 1 October 2017 or the postponement option must be utilised.

Net pay problem

Employees in larger public sector organisations, such as local authorities, tend to be enrolled in statutory pension schemes which are operated on a net pay basis, rather than the relief at source method, which is generally used by private sector pension schemes.

Using the net pay basis, the employer deducts the pension contribution from the employee’s pay before it deducts income tax via PAYE. The pension contributions don’t reduce the employee’s salary subject to NIC. But this distinction between the net pay and relief at source methods creates tax relief discrimination for the lower paid.

An employee earning less than the personal allowance (now £11,500) but above the £10,000 auto-enrolment threshold will find they are paying their pension contributions gross with no tax relief, as there is no tax to be ‘relieved’.

In public sector schemes, the employee’s contributions may also be significantly higher than the current statutory minimum as well. This makes it even more discriminatory when contrasted with the 45% automatic tax relief via net pay schemes given to the high earners in the public sector.

Trouble ahead

Those employees who are in net pay schemes paying the 1% minimum contribution under auto-enrolment will see that level of contribution rise to 3% in April 2018, and 5% in April 2019.

Lesley Titcomb, the head of the Pension Regulator has already aired her concerns that those who are ‘just about managing’ may well have to sacrifice pensions savings as the minimum level of contributions rises. This may be the case, even where the employee is lucky enough to be in a ‘relief at source’ pension scheme, where all employees, regardless of whether they are taxpayers, get 20% tax relief. 

The political juggling act

In his new post as DWP Secretary of State, David Gauke will be doing battle with former Treasury colleagues to get his pensions agenda acted upon. Writing in the financial press recently he pledged to tackle some of the ‘to do’ list inherited from the DWP ministerial team. 

Sadly, at the Association of British Insurer’s conference when pressed on the thorny topic of pensions’ tax relief, he "saw no particular consensus emerging" for a new form of tax relief. 

This is despite the Chancellor announcing in the April 2015 Budget that a total overhaul of pensions’ tax relief was due, given that it was costing the Treasury a whopping: £35bn a year (or £20bn after you net off the tax on pension income). It is worth noting that 60% of that £35bn goes to just five million taxpayers.

Strangely, all was quiet on pension tax relief in the 2015 Autumn Statement and the Budget 2016 was also silent on the topic. Now, two years of inactivity due to the political climate means a perfect storm is brewing from October 2017 onwards.

Way forward

Without tackling the inequity that is pensions’ tax relief, the Government risks not only further charges of the public sector pay cap being unsustainable, but also that the lowest earners in the public sector being denied the opportunity to save for their retirement. Rather than looking down the sofa for the £5bn he needs to lift the public sector pay cap, perhaps the Chancellor could allow David Gauke to do the sums and reform pension tax relief?

The answer, as with most contentious decisions in a hung Parliament, is ‘who would we upset?’

About Kate Upcraft

Kate is a technical writer, editor and lecturer on all aspects of employing people - primarily payroll and HR matters.


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10th May 2018 16:31

The implication of this article is that Net Pay is a poor method of tax relief for the poorly paid. The employee contributions made by poorly paid staff have been subjected to both Employee and Employer NI contributions. Therefore why would any responsible employer encourage its poorly paid staff to make such a contribution at all?

I would argue the contrary view. A responsible employer should be making all the contributions for the poorer paid staff. A responsible employer should be using relief at source in its pensions scheme. This is to ensure that the government doesn't tax the higher rate tax payers on their employee contributions for 20% of their contributions which do not receive relief from so-called 'Relief at Source'.

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