In July, HM Treasury published a call for evidence to explore the main methods of administering pension’s tax relief, and look into how improvements could be made to them to address an anomaly that currently exists for some low-paid employees.
The two current methods delivering pensions tax relief are:
- Net pay arrangements, such as the RPS and BTPFSF – where contributions are deducted from the employee’s gross pay, so that full tax relief is obtained immediately at the individual’s highest rate of marginal tax.
- Relief at source (RAS) arrangements – where contributions are deducted or received from the employee’s net pay and are treated by the administrator as being paid into the scheme after deduction of basic rate tax.
While both methods deliver the same outcome for the majority of pension savers, low earning savers (earning less than current basic tax threshold of £12,500) do not receive any tax relief on their pension contributions under the net pay method, as they have not earned enough to pay tax on their earnings.
The government is considering four potential solutions, including:
- Paying a bonus based on “Real Time Information” data for lower earners in net pay schemes
- A standalone charge on RAS schemes recouping tax ‘relief’ not due to lower earners
- Employers operating multiple schemes, one net pay and one RAS. Where employers would switch employees contributions between the two depending on their earnings; and
- Mandating the use of RAS for defined contribution (DC) schemes
The deadline for the responses to the current proposals and any other proposals that could more broadly improve the administration of RAS schemes is 13 October 2020.