Millions are missing out on pension tax relief, says new research

8 Apr 2019 By Maggie Baska

Royal London finds many more low-paid and part-time workers than previously thought are paying too much in contributions

As many as 1.75 million part-time and lower-paid workers could be missing out on pension tax relief, half a million more than previously thought, according to data published today.

Royal London estimated workers caught between the threshold for automatic enrolment in a pension scheme – £10,000 – and the income-tax threshold of £12,500 a year could be due around £60m each year in pension tax relief.

The issue arises because individuals whose employers use a group personal pension arrangement receive tax relief at source, even if they earn less than the income tax threshold. But most trust-based occupational schemes and public-service pension schemes do not automatically facilitate pension tax relief to those under the income-tax threshold.

Steve Webb, the former pensions minister and now director of policy at Royal London, said it was a “scandal” that so many individuals missed out on tax relief on their pension contributions. 

“This is the group that most needs a boost to their pension savings,” Webb said. “These new figures suggest the scale of the problem is much bigger than previously thought.”

A previous estimate from the Low Incomes Tax Reform Group put the number of affected workers at 1.2 million, based on HMRC data for 2015/16. 

A Freedom of Information (FOI) request from Royal London, which asked for further information on 2016/17 figures, found the number rose to 1.3 million. 

Royal London noted the increase in affected workers occurred as the personal tax allowance rose from £10,600 to £11,000 in 2016/17. Since then, the allowance has risen by another £1,500 alongside a continued rollout of automatic enrolment, bringing millions more low-paid workers into pension saving. 

If the extra £400 on the personal allowance meant an additional 110,000 people were affected by the issue, Royal London estimated that another £1,500 could extend this to 412,500 workers by 2019/20. 

This would mean that around 1.75 million low-paid and part-time individuals could miss out on pension tax relief due to the way their schemes are set up. 

Last week, the Work and Pensions Select Committee questioned Department for Work and Pensions (DWP) ministers on the issue, but were told officials “did not know” how many workers were affected. 

The committee heard the average worker would miss out on £35 per year, amounting to roughly £60m across the 1.75 million workers Royal London thought could be missing out on tax relief. 

According the the mutual insurer, around three-quarters of the affected workers are women. 

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said employers needed to make it clear to low-paid and part-time workers the benefits and limitations of their pension schemes, so they can make an informed choice. 

“If employees earning under the £12,500 threshold can afford to put more than the auto-enrolment minimum away for retirement, and their employer won’t match additional contributions, they should consider opening a self-invested personal pension or a Lifetime ISA separately from their workplace pension,” Coles said. 

She added the contributions made into either scheme would attract government top-ups, regardless of whether or not the worker paid income tax. 

Last October, the government rejected calls from the Treasury Committee to reform pensions tax relief after it said there was “no clear consensus to do so”. 

In its response, the government said any changes to the regime could have “significant impacts for pension schemes, employers and individuals”.

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