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What are those who call for reform suggesting? Fairness at the top end is dealt with by the annual and lifetime allowances, which limit tax relief for high earners. Surely the problem, if there is one, at the bottom end is the net pay approach? Are those calling for reform suggesting that low earners ought to be given an extra tax allowance (how would that help if they are non-taxpayers?) or have a credit paid to their pension by HMRC? How complex would such a system have to be to level the playing field accurately and fairly?
Firstly, how likely is it that a person paying only £175 per year into a private pension (to get £35 of tax relief) will be troubling the taxman when they draw the resulting pension in due course? Not very, given that the personal allowance is already £3k higher than the flat-rate state pension.
Secondly, if those affected were in group personal pensions, they would get tax relief automatically added to their pension pot, even though they hadn't paid any tax. Employers can deal with that by opting for RAS arrangements instead of net pay. And as low earners, they probably still won't have any tax to pay when they finally draw their pensions.
I know £35 is a lot of money when you have none (I was a student once upon a time, so I do know what it's like!), but those affected don't actually get that free money for years, and I wonder whether the Chancellor doesn't have bigger fish to fry.
Funny, I thought this article would be going the other way.
I have noted lots of payments coming out of net pay after income tax is deducted, not out of gross pay, so higher rate tax payers don't get the proper deductions for relief due.
I don't follow the logic that a non-tax payer ought to be getting basic rate tax relief on pensions. Quite frankly they probably ought not be paying into a pension in the first place, but putting the funds into an ISA.
Mandate that all ee contributions are made (for tax) as though a Salary Sacrifice arrangement is in place - ie give full IT and NIC relief at source
Then consistent, simple, full relief is given (incl for NIC) and no one is disadvantaged because their company doesn't jump through the Sal Sac hoops and advisers don't need to look at each person's payslips to see what to do in their SA return re pension contributions.
Easy really. My appointment to the highest levels of government awaits
It sounds easy, doesn't it? But how do you deal with people who pay their own pension contributions, if you want fairness and parity of treatment? One of the simplifications in 2006 was to put everyone paying into a RAP or PPP onto the same footing - basic rate relief at source, with HR relief through SA or a coding adjustment, and a £3,600 (£300 per month) de minimis threshold for worrying about whether relief is due at all. To give employee contributions tax and NIC relief out of gross pay, you need an employer scheme. About 4.5m self-employed people don't have one. So, do you then go back to net pay for all employees and RAS for the self-employed? And FSAVC contributors? Pensions re-complification (not that 'simplification' did anything of the sort, of course ...)?
The £10K earnings threshold is planned to be abolished in the mid 2020's so whilst no immediate plan at least contributions will increase in due course.
Hi Adrian can you point me to where it’s been announced that the £10k earnings trigger is being abolished? I thought it was the qualifying earnings threshold that was going so that contributions, once triggered begin from pound one rather than the threshold.
The headline in the Times made me smile today saying that Tory policy is now to target support to low paid women. If that’s true, the NPA anomaly ought to be on the agenda as this predominantly affects women and many in the public sector
The plan is certainly to remove the LEL, not the trigger. However this would itself cause issues because employees earning close to the trigger value, who currently contribute very little, would see a proportionately large increase in contributions. For example from next year someone earning £10,500 will pay £218 in contributions on pay in excess of the LEL. If contributions were on all their pay this would rise to £525. Employers would also see an increase, albeit a smaller one since their contribution rate is lower.
Hence why the implementation was misguided, the very people, those say with multiple employments- cleaning job in morning working in after school club in afternoon- were the ones that needed AE the most, a lot of them have now missed out multiple years.
What they ought to have done is started it at a low percentage on all earnings and then wound it up at a slower rate.
I took out a whole of life policy many years ago with a 10% contribution escalator for the first 10 years built in at outset, I never even noticed the increases.
If they had started on all earnings at outset they could have spread the percentage escalation over a longer period, the way this is going to come in is likely going to result in opt outs.
Most low paid earners that I know of opt out of auto-enrolment - they have no spare cash for the luxury. Bearing in mind that if they have rubbish pay, then they get rubbish pension anyway.
The NPA tax relief process costs the government nothing. It allows a true relief against an equivalent amount of tax that would have been otherwise paid.
RAS is a guesstimate basis, the investment in the pension is limited to basic rate alone on a delayed claim basis.
It is a pain to administer and potentially complicated as a result of devolved tax.
If government really wants to give away money for those who do not pay tax, then a new means of pension contribution credit needs to be introduced.
The problem is not the NPA.
The fact is that the desire of HMG to force & encourage the low paid to save through pensions is a con trick. People who are barely managing cannot afford to make contributions so why make them? Because it will save HMG money when they retire, any pension income will be taken into account when calculating pension credit or whatever it will be called so it really only HMG that benefits (& the pension company)