PENSIONS
What’s happening with the net pay arrangement anomaly?
Henry Tapper, chief executive officer for AgeWage, provides an update on the net pay arrangement anomaly and legislation released by the government O n 20 July 2022, the Treasury published draft legislation placing a duty on HM Revenue and Customs some low earners have made to pensions since 2015. The money won’t be paid to those
As the gap between the lower income threshold for automatic enrolment has fallen behind over the last decade, more and more people found themselves in pension schemes where they didn’t qualify for the savings subsidy. It’s now estimated that over 1.3 million of the 32 million pension savers aren’t getting promised savings incentives - purely because they’re in pension schemes that don’t offer relief at source. What compensation is being paid? The compensation to be paid to people in 2025 only relates to overpayments of contributions in 2024/25. All the overpayments over the previous ten years won’t be compensated, so for some longer-term savers, compensation will be for one year in ten. There’s no carry-back or carry-forward provision, as has been available to those with higher rate tax-relief claims. Those on low incomes are being presented with a take it or leave it solution. A proper settlement is required This might not have been so important, had there not have been a cost-of-living crisis in 2022 – a crisis which looks like it will continue to 2024. The impact of falling into the net pay anomaly is that a £100 contribution into a pension costs £25 more than if it were made under relief at source. The impact is on take home pay, and directly impacts a person’s capacity to pay their food and heating bills. Many campaigners, including Margaret Snowden and I, see a strong case for a one-off flat-rate payment made today – to all who have been impacted since 2015. n
impacted automatically; and people will be asked to claim by submitting their bank account details to HMRC. After years of scams, many may be wary of doing that. HMRC expects 120,000 people not to claim, and non-claimants may be higher unless there’s strong publicity. Meanwhile, throughout the cost-of- living crisis, that some believe will extend to 2024, occupational schemes without a relief at source scheme will be able to over-deduct pension contributions by 25p in the pound. What compensation is provided in 2025 may be too hard to claim for many of the 1.32 million people affected. We’ll never know how many people gave up on pensions because of this hidden overpayment, nor the impact on low- income households the overpayments have had. So, how did the net pay anomaly come about? Originally, the lower earnings limit to be automatically enrolled at was set at the lower limit you started paying tax. So, back in 2012 -2015, only taxpayers were automatically enrolled. But from 2015, people started being enrolled whose earnings didn’t meet the personal allowance, and this gap has increased ever since. It’s meant that those non taxpayers contributing to occupational schemes, both defined benefit and defined contribution, have had to meet the full cost of contributions. However, those paying into group personal pensions and a select few master trusts, such as People’s Pension and Nest, have received a 20% subsidy.
(HMRC) to make top-up payments to individuals who save into an occupational pension under net pay arrangements, if their total taxable income is below the personal allowance for tax. The legislation concedes an injustice to the low paid (mainly women) which has persisted for ten years. The impact on a low-earner’s take home varies but could be as much as £170 per year. The Treasury estimates that 1.32 million people will be eligible for the first top-up payment in April 2025, of whom 1.2 million are expected to claim. The net pay anomaly was first brought to the public’s attention through the Friends of Automatic Enrolment and the CIPP by Kate Upcraft in 2015. The Conservative party later included plans to review the problem in its 2019 manifesto. The Net Pay Action group, headed by Ros Altmann and sponsored by the Low- Income Taxpayers Group (LITR), applied pressure to the situation, and wanted to see movement on the campaign pledge. A consultative paper outlining HMRC’s proposed solution was launched and responses published in October 2021. The Treasury may think, having passed the draft legislation to compensate low earners for not getting promised pension saving incentives, that the net pay anomaly is no more. But there are many who are far from ready to accept the solution offered as either satisfactory or final. The government’s proposal is seen as unsatisfactory as it offers no backdating before April 2024. The ‘top-up’ will be no more than 10% of the overpayments
| Professional in Payroll, Pensions and Reward | October 2022 | Issue 84 54
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