Uncertainly remains for millions of low paid workers as to whether they will get tax relief on their pension contributions, according to one pension provider.
The Department of Work and Pensions has announced that the amount that people need to be earning and at which point they are automatically enrolled into their workplace pension scheme remains at the current threshold of £10,000.
All employers must automatically enrol their staff aged between of 22 and state pension age into a pension scheme and make contributions to their pension (provided they earn a minimum of £10,000). The problem is that the tax allowance tax threshold below which an individual would not pay tax is higher at £11,850 and due to rise to £12,500 for 2019/20. So, there is a question-mark as to whether individuals earning between the threshold and the income allowance will get tax relief on their pension contributions.
If an employer runs a scheme which operates on a ‘relief at source’ system it will deliver tax relief to non-taxpayers. But an employer which operates a ‘net pay arrangement’ system for its scheme may not.
Steve Webb, director of policy at Royal London (pictured above) said: “The gap between the point at which people are enrolled into a pension and the point at which they start paying tax will become a chasm in 2019. This means hundreds of thousands more workers will find that whether or not they get tax relief will depend on the lottery of what pension arrangement their employer has chosen for them. Government cannot keep kicking the can down the road on this issue. It now needs to be resolved as a matter of urgency”.
In its recent review of the automatic enrolment earning level the DWP said of the earnings threshold that: ‘If it is too high then low to moderate earners who can afford to save (and who are the main target group of the policy), may miss out on the benefits of a workplace pension. Set it too low and the predominant impact will be upon people for whom it could make little economic sense to divert income away from their day to day needs, and this could potentially result in greater numbers of individuals making a conscious decision to opt-out.’
It added that: ‘The existing threshold of £10,000 remains the correct level at this point in the establishment of automatic enrolment and will not change for 2019/20. This represents a real-terms decrease in the value of the trigger when combined with assumed wage growth and will bring in an additional 40,000 individuals into the target population. The decision reflects the key balance that needs to be struck between affordability for employers and individuals and the policy objective of giving those who are most able to save the opportunity to accrue a meaningful level of savings with which to enter their retirement.’