The Conservative party’s manifesto promises a comprehensive review of how to fix an issue for a number of workers who earn between £10,000 and £12,500.
The Net Pay Action Group (NPAG) calculate that this group contains around 1.7m people who have been missing out on pension benefits because of a loophole affecting people with net pay pension schemes. A future Conservative government would conduct a comprehensive review to fix the issue.
The problem has arisen because the automatic enrolment (AE) earnings threshold has remained at £10,0000, but the income tax threshold has nearly doubled since the start of AE to £12,500. NPAG reckons that AE accounts for the majority of people missing out.
Many pension experts, including Adrian Boulding, director of policy at NOW: Pensions, have expressed concern that when people find out they have been missing out they will blame AE - souring what is generally considered a government success story.
The problem may be bigger than the Conservatives reckon. Helen Hargreaves, associate director of policy, at the CIPP said that you can earn a lot less than £10,000 and still be caught in the loophole.
She added: “Many low earners get enrolled when one period’s earnings spike above the pro-rated threshold. Once in, they stay in, little knowing they could be paying 25 percent more for their pension contributions than the same worker in the office next door”.
Not all workplace pension schemes work the same. Net pay schemes only pay tax incentives to the taxed, while relief at source schemes pay incentives to everyone. NEST pays incentives to everyone, Smart and NOW only to the taxed while People’s swings both ways.
Generally insurance companies pay incentives to everyone but there are exceptions, Legal & General offer two master trusts which use different ways of granting tax relief and incentives. On the other hand, traditional occupational schemes - including all government schemes, use net pay.
We welcome the government focussing on this problem, a group of us led by Baroness Altmann - including the CIPP and several pension providers - have been lobbying the Treasury and Department for Work and Pensions for action on this and we’ve been rattling the cages of all the political parties. It’s great that after four years of trying, one has finally pledged to do something about it.
Hargreaves was confident the problem could be fixed, quickly and easily. She said: “We’ve been working with the Low Income Tax Reform Group and taken our work to the Office of Tax Simplification. Government has conceded that a P800 solution that rebates unpaid incentives to those impacted after a year-end sweep, could be coded and integrated into HMRC’s systems at am estimated cost of £10m. This seems a small price to pay for fixing a big issue”
While the size of any incentives would be unlikely to exceed £65 in any year, the numbers of people not getting what they were promised was increasing each year the AE earnings threshold stayed level and the income tax threshold went up.
The government has a chance of nipping this problem in the bud, but the intervention couldn’t have come a moment too soon, each month that goes by is making the problems caused by the net-pay anomaly - a little worse.