Her Majesty's Treasury has published a Call for Evidence (CfE) on tax relief administration.  It is looking to gather evidence on improvements that could be made to the administration of pensions tax relief. Specifically, to remove the anomaly that results in low earners (whose income is under the personal income tax allowance) receiving less generous tax treatment if their scheme uses a net pay arrangement.

The Treasury has set out four approaches to address the anomaly. This is warmly welcome, and in-line with the manifesto promise which will help around 1.5 million individuals, due to the way their pension is taxed. However, the solutions can be fiendishly complex and this was originally part of a wider review of the whole tax-relief system which was dropped in 2016.

There are two methods for pension schemes to administer tax relief—relief at source (RAS) or using a net pay arrangement (NPA).

In a NPA an individual receives tax relief when pension contributions are deducted from their pay by their employer before tax is calculated. Where RAS is used, a pension scheme claims tax relief at the relevant basic rate from Her Majesty’s Revenue and Customs (HMRC) because the individual’s pension contributions are made from earnings after tax has been calculated (those who pay tax above the basic rate need to reclaim any additional tax relief from HMRC).

In the majority of cases, both methods will result in the same outcome for members, however, a difference in treatment arises where a member has earnings that are within the personal income tax allowance. Such a member will not receive tax relief if an NPA is used (because their earnings were not subject to tax in the first place), but they would receive a top-up equivalent to basic rate tax relief if RAS is used.

While we are supportive of this issue being addressed, any solution needs to be put in context of the overall £40bn tax relief bill and ensure tax is not overly complicated, so that as individuals we know how to act rather than be confused. This may mean we need to understand and communicate tax treatment more clearly and regularly to each of our members. 

Please get in touch if you require any further information.