Pensions minister Ros Altmann has pledged to address the “major injustice” caused by net pay arrangements (NPA) that cut lower earners’ pension contributions by up to 25%.
Speaking at the Headlinemoney pensions dinner, Altmann described the situation around NPAs as “an outrage that needs to be addressed” and “high on her list of priorities”.
Currently, pension contributions are calculated either through NPA where gross contributions are deducted from pre-tax pay, or relief at source (RAS) where net contributions are deducted from post-tax pay.
The issue arises because of the gap that has grown between the threshold for automatic enrolment (currently £10,000 per year) and the threshold for income tax (currently 11,000 per year).
If someone earns an amount between these thresholds they will be automatically enrolled but they are likely to be a non-taxpayer.
If the scheme is set up as an NPA arrangement then because the worker is earning under the tax threshold their gross and net pension contributions are the same. This means no tax relief is given.
If a scheme uses an RAS arrangement then tax relief for all scheme members is delivered via direct payment from HM Revenue & Customs (HMRC) to the scheme.This includes those earning below the tax threshold.
Penalty
Altmann said there is a lack of awareness on this issue, even within the pensions industry.
“This is a major injustice that people don’t even know about,” she said. “Many people don’t realise their lowest paid members are paying more for their pensions than higher earners under NPA arrangements. They could face a penalty of between 20-25%.”
In March 2016 auto-enrolment scheme Now Pensions, which operates an NPA arrangement, announced it would make up the income tax relief shortfall for scheme members that are not taxpayers and miss out on the tax relief that they would receive under an RAS arrangement.
At the time Now Pensions chief executive officer Morten Nilsson said: “Through no fault of their own non-taxpayers in net pay schemes are being disadvantaged because of the increase in the nil rate income tax band.
“We are talking to the Treasury and HMRC to find a way to resolve this anomaly over the long term but, in the interim, we will put our hands in our pockets to top up these members’ pension pots.”
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