Reward
Ian Neale, director at Aries Insight, discusses two of the Conservative party’s general electionmanifesto commitments on pensions What lies ahead
T he Conservative party’s manifesto indicates that developments in the pensions arena are quite likely to receive attention. One of these is the ‘net pay scandal’, where much more than a million low- paid workers have been automatically enrolled without benefiting from tax relief on their pension contributions. This happens because employers choose the pension provider, most of which – especially the master trusts – operate net pay arrangements (NPA), rather than the alternative relief at source (RAS) route that personal pension providers are obliged to use. Via RAS the provider automatically claims 20% tax relief from HM Revenue & Customs (HMRC) on pension contributions up to £2,880 per annum for every member, regardless of their earnings. Under NPA, tax is applied to net income after deduction of pension contributions from gross pay; so, if a person’s net income is below the income tax personal allowance (currently £12,500) they won’t pay tax but nor will they get any tax relief on their pension contributions. Many of those caught by this NPA scandal earn above the earnings trigger (£10,000 per annum; £192 per week) but below the personal allowance. Others earn more than £12,500 in total, but still miss out because their total earnings arise from more than one employment, with at least one paying more than the lower qualifying earnings threshold (currently £6,136 per annum) for deduction of pension contributions. Some Scottish taxpayers miss out too, in a more modest way: 19% of taxpayers in RAS arrangements get 20% tax relief, whereas under NPA 19% taxpayers only get 19% tax relief. This is widely recognised as unfair, and also discriminatory as about 75% of those affected are women; and the net is set to widen when the age threshold is lowered
from 22 to 18 and the lower earnings threshold is scrapped, as planned for the mid-2020s. The Low Incomes Tax Reform Group has been campaigning for years to get this fixed, and last year put forward a concrete solution which it seems finally caught the ear of the outgoing Conservative government, whose election manifesto promised to “conduct a comprehensive review”. ...using pay as you earn real time information data to identify low- income workers... The favoured solution involves using pay as you earn real time information data to identify low-income workers making pension contributions under NPA schemes. Via an annual end-of-year reconciliation using the P800 process, HMRC could then provide tax relief equivalent to that which would have been received via RAS. The other problem most likely to receive attention is the deterrent effect of the annual allowance (in particular, the tapered annual allowance) upon senior national health service clinicians. In the run-up to the election, the outgoing government launched and hurriedly re- launched complicated proposals whereby eligible members of the NHS Pension Scheme would not only be able to elect for ‘scheme pays’ to cover any annual allowance charge, but also to receive a cast-iron guarantee of an extra salary payment upon retirement, to cover the amount deducted from their pension to repay the Scheme for the earlier tax charge. Nobody thinks this is anything but a
temporary fix. Many people advocate scrapping the taper on the grounds it is simply unworkable. Again, the Conservative party manifesto promised an “urgent review”. No doubt this will encounter a brick wall at the Treasury; after all, their tapered annual allowance is no more than a slight reformulation of the pre-2010 Labour government’s plans for a special annual allowance. Government announcements about this ‘solution’ focused exclusively on the NHS, because that was the locus of the most obvious political pressure point. However, it will be very difficult for any government to resist demands for equal treatment from other public sector workers potentially subject to annual allowance charges, including members of the armed forces, the police, firefighters and teachers. The government will then have some further difficulty in defending unequal treatment of members of private sector schemes, for whom no such special treatment is proposed. In turn, that will throw light upon existing public-v-private sector discrimination, notably the lifetime allowance (LTA) charge threshold. Defined benefit pensions these days are enjoyed largely only by public sector employees, who can accrue a pension of over £50,000 without attracting a LTA charge. A money purchase pension pot sufficient to purchase a similar pension would cost over £2,000,000, double the current LTA; with at least another £300,000 required to pay the LTA charge. Will the Treasury succeed in putting up the shutters? Let us hope not; but the Pensions Bill previewed in the recent Queen’s Speech might occupy enough political time and space to create a distraction for these tax legislation ‘anomalies’, keeping them parked in the long grass where they have languished for too long already. n
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| Professional in Payroll, Pensions and Reward |
Issue 57 | February 2020
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