HMRC’s “archaic” pension tax relief system discriminates against lower paid and needs “urgent overhaul”


There has been a call for an urgent overhaul of the archaic HMRC tax rules which are denying the lower paid the chance of a comfortable retirement and unfairly benefitting those on higher salaries.

These proposals come as former Pensions Minister Baroness Altmann voiced her concerns that lower earners and non-taxpayers who were auto-enrolled into a Net Pay Arrangement (NPA) workplace pension were not entitled to tax relief and thereby effectively paying more for their pension than their better paid colleagues.

As things stand, employees whose taxes are subject to the net pay arrangement (NPA) and are earning less than £11,500 – the personal tax allowance – miss out on a 25 per cent government bonus, provided via tax credit that their higher paid colleagues enjoy. Government statistics put the number affected at 280,000.

The alternative mechanism, ‘relief at source’ (RAS) means members pay tax before contributions are paid to the scheme and the pension provider reclaims the government incentive for all, ensuring non-taxpayers do not lose out on any funds. Currently, one scheme cannot combine both RAS and NPA while RAS is not permitted for non-taxpayers.

Graham Peacock, Managing Director of Salvus Master Trust recommends that an urgent overhaul of the system, at the level of primary legislation takes place as it would allow RAS to be applied to the pay packets of lower earners as a simple and cost-effective way of resolving this anomaly and rebalancing the incentives system in favour of those most in need of support.

The budget for pension tax relief is £38.2bn annually, roughly a third of the size of the NHS’s annual budget of £124bn. However, according to Peacock, we are disproportionately rewarding the well-off whilst penalising the poor. Furthermore, it is the younger workers who need to be incentivised against a backdrop of ever decreasing retirement benefits being made available from the state.

Commenting, Peacock said: “The current taxation system run by HMRC is simply not fit for purpose. It is a throwback to a time when non-taxpayers and the low paid were not the focus of a workplace pension. The tax incentive to save for retirement does not reflect the strides the DWP has made in bringing lower earners into auto-enrolment. As a result, the scales are tilted massively towards those who can most afford to fund themselves in retirement, which is perverse, especially given the low levels of saving in the UK and the efforts the Government and others have made to reverse this. It seems the very system is set up to fail those most in need of tax incentives.

“If you consider both ends of the spectrum, you might have a businessman in his 60s who could potentially, under the current arrangement, add up to £40,000 pa to his pension fund and claim back 40 per cent tax relief – essentially free money from the Government. At the other end, a single mother in a low-paid part time job who might be struggling financially and have no other financial assets to her name would not be entitled to any such incentive. HMRC must change this startling injustice and create a mechanism to allow this Government incentive regardless of the type of registered pension scheme used.”