LOOKING TO MAKE A DIFFERENCE IN YOUR ORGANISATION?
PENSIONS
The CIPP, in partnership with Loughborough University, offers experienced managers the opportunity to gain a recognised university qualification in Strategic Leadership, with the benefits of part-time learning to fit around their schedule. This qualification will help organisations to retain and develop talent, build management and leadership capability and bring an extra dimension to existing professional development within their organisation. MSc in Strategic Leadership
of earnings. With this method, whatever rate of tax the employee pays, they get full tax relief without having to claim it. However, if they don’t pay tax, this method means they won’t get any tax relief added to their contributions l RAS: pension contributions are taken from the employee’s net pay after tax is calculated. The pension provider then claims 20% in tax relief directly from the government, which they add to the employee’s pension pot. The confusion around the different scheme types can lead to the following errors: l the contribution is taken from an employee’s pay as an NPA through the payroll, but the pension scheme is a RAS scheme. In this situation, tax relief is given twice – once through the payroll and then once when the pension scheme adds the relief from the government l the contribution is taken from an employee’s pay as RAS through the payroll, but the pension scheme is an NPA scheme. In this situation, tax will have been overpaid by the employee and insufficient employee pension contributions will have been paid into the employee’s pension pot without the tax relief added. Where this happens, especially over a period covering multiple tax years, it can be difficult to correct what’s gone wrong. Because the correct amount of earnings won’t have been subject to tax under pay as you earn, HM Revenue and Customs (HMRC) will hold the employer responsible for the underpaid income tax. If the employer hasn’t exercised reasonable care, HMRC can go back six tax years to recover the underpaid income tax due and levy a financial penalty. These errors can be extremely costly to employers, with fines for non- compliance in relation to AE being as much as £10,000 a day. Other important differences to make employers aware of is that with RAS schemes, employees are only given basic tax relief of 20%, even if they’re a higher or additional rate taxpayer. To claim this tax relief, they need to either add this claim to their self-assessment tax claim or contact HMRC directly. According to a series of Freedom of
Information requests to HMRC, higher- rate taxpayers have left behind an average of £245 million in pension tax relief each tax year, while additional rate taxpayers have foregone about £18 million each year. The total amount unclaimed between 2016/17 and 2020/21 was £1.3 billion. The NPA anomaly Another difference which has recently been highlighted is that some people saving through an NPA have received less take-home pay than similar earning savers in a RAS scheme. This is because those enrolled in RAS schemes receive a 20% top-up from the government on their savings, while those below the income tax threshold (£12,570 for 2023/24) in NPA schemes receive tax relief at their marginal rate of 0%. To resolve this inequality, the government announced that legislation will be introduced in the Finance Bill 2023 which will enable HMRC to make a top-up payment to low earners for the tax year 2024/25 onwards. The top-up payments will be made directly to eligible individuals. HMRC will determine eligibility based on whether individuals have contributed to a net pay pension scheme and if their total taxable income is below the personal allowance in the same tax year. HMRC will contact those individuals and provide details of how much they’re entitled to, which will be calculated using HMRC systems. By ensuring we understand these rules of tax relief, we can help employers to safeguard against the financial risk these errors can create. Also making them aware of the other differences can help their employees benefit from bigger pension savings. Overall, it could be a good idea to perform an audit against the pension schemes to ensure they’re being operated correctly for payroll purposes and to communicate to employers these fundamental differences to confirm they’re aware. If the employer is unsure, it’s best for them to check with their pension provider directly to verify the tax relief status. With everyone watching the pennies at the moment, let’s not get caught out! n
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| Professional in Payroll, Pensions and Reward |
Issue 90 | May 2023
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