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Pensions Tax Relief Administration

Pensions Tax Relief Administration Explained By Hayvenhursts

In July 2020 the Treasury called for evidence on the administration of pensions tax relief and this was announced in the 2020 budget.

The Treasury has confirmed that the UK government now recognises that the 2 administration methods produce different outcomes in circumstances for different groups of taxpayers and some can receive tax relief at a different rate. 

The treasury has noted that many of the taxpayers who are likely to be affected will be lower earners who don’t regularly use the tax system or don’t earn enough to pay tax. 

The call for evidence is to gather evidence on both of the main methods of administering pensions tax relief and gather views on the consistency of outcomes for individuals with similar circumstances. The aim is simplicity for individuals, employers and pension schemes and is focused on pensions tax relief administration only.

The problem arises as although many pension schemes relief at source (RAS) on pension contributions, other pension providers add this money through a net-pay arrangement.

In Summary;

If you are in an RAS pension scheme:

  • You don’t pay tax on your take home pay and this is because your taxable income is below the personal allowance
  • You still receive a payment into your pension equivalent to tax relief at the basic rate, like all others in RAS pension schemes
  • As you do not pay tax, this is effectively a government top-up paid into your pension

If you are a lower earner in a net-pay scheme:

  • You have your contributions taken out of your pay before tax is calculated
  • If your remaining pay after your pension contribution is below the personal allowance, then you do not receive the same top-up that lower earners in RAS schemes receive

RAS schemes take the assumption that an individual has paid at least basic rate tax on all of their pension contribution, however, an individual in the net-pay scheme would only have paid basic rate on part or none of their pension contribution had it been taxed as income.

This means that lower earners in a net-pay scheme who earn less than the £12,500 threshold for paying tax, don’t receive the top-up that lower earners in RAS schemes receive, resulting in a difference in their tax treatment dependent on the method of tax relief used by the pension scheme for someone who does not pay income tax. . 

John Glen MP – Economic Secretary to the Treasury has stated in the call for evidence which can be found here:

The current methods for administering pensions tax relief have evolved over time. Pensions were originally provided through workplaces, which meant tax relief on pension contributions could be made from income that had not yet been taxed. The introduction of personal pensions, however, meant another system for administering pensions tax relief was required from 1988 as pension contributions could now be made from income that had already been taxed. The majority of saving into a pension is unaffected by which method of pensions tax relief administration their scheme uses. However, low earners saving in a pension may end up in differing financial positions depending on how their scheme is administered. 

The 2019 Conservative Party manifesto committed to a review of the options available to try to address this issue. I am pleased to present this call for evidence as the next step in delivering on this commitment. Any change could create challenges elsewhere, either for pension schemes, their members or the wider personal tax regime. 

To date, a straightforward and proportionate solution has not been identified. This call for evidence, therefore, presents the options we have considered and seeks views on our assessment of them and their impacts. I would also welcome suggestions for other possible solutions to address this issue. I am mindful that pensions administration can only be effectively delivered through successful partnership between the government, the pensions industry, employers, and professional administrators of payroll and other systems. The government therefore wants to listen to all those who work with these systems on a regular basis to understand the options available to improve the administration of pensions tax relief.

Pensions Tax Relief Administration

Why is there a Call for Evidence Now?

The government wants to ensure that people at pensionable age are able to live with the dignity and respect they deserve and since the introduction of automatic pension enrolment they support private pension contributions by providing tax relief within certain limits. They understand that the foundation of financial support for people at retirement age is their state pension and their additional payments into personal pensions offer them greater security and independence for them to not just live, but to be able to enjoy their life when they retire. 

The call for evidence is to gather evidence on the two main methods of administering pensions tax relief by pension schemes, and to review and agree what improvements can be made. The review will ensure a low earning individual’s take home pay is not adversely affected by the method of tax relief chosen and made by their personal pension scheme.

In the call for evidence the government wants to understand what changes can be made to ensure no one is adversely affected by the different methods of tax relief administration which can be made by different pension schemes. Any changes to the administration methods will need to address the difference in treatment for low earning pensioners, be simple and straightforward as well as a consistent and fair solution for all individuals.

There are concerns that any changes made could result in increased complexity into pensions and their tax for both employers, employees and pension schemes. There is also a concern that changes could be difficult to explain to individuals and could lead to greater engagement needed with HMRC from individuals who at the moment would have no need to be in contact with them. Therefore, any changes that are made need to be simple and straightforward solutions for everyone, savers as well as being easy for pension schemes and employers to operate.

The UK’s population is ageing and the Office for National Statistics predicts that more than 24% of people living in the UK will be aged 65 or older by 2042 which is up from 18% in 2016/2017. 

An ageing population is a major achievement of science and healthcare, however, the rise in the age of the UK’s population is causing concerns about retirement and the sustainability of state and personal pensions. 

As a result of the government’s successful introduction of automatic pension enrolment roll out for all employers from October 2012, more employees than ever are paying into their workplace pension schemes.

In 2018, 87% of eligible employees were contributing to their pensions which is an increase from 55% in 2012. The increase in the proportion of women, workers under 30’s, and those people earning less than £30,000 are particularly representative in the automatic pension enrolment. This means that the simplification and changes to the administration methods for tax relief for pensions is vital to make it consistent and fair across the board. 

Automatic pension enrolment has also resulted in many more people now adding to their employee pension themselves for the first time. This however, has resulted in a large number of new pension savers in the UK with limited understanding, experience and knowledge of their own pension and pension schemes in general.

The government supports people contributing to their pensions by providing tax relief so they will have a good enough income, or funds they can draw from their pension when they get to retirement age. 

The government’s pensions tax relief operates on the basis that pension contributions (up to certain limits) should be free of income tax. 

However, funds taken from a pension scheme are subject to income tax when they are withdrawn usually after an individual has reached the Normal Minimum Pension Age (currently age 55).

There are two ways for you to receive income tax relief when saving earnings into a pension and these are: 

  1. net pay arrangements – an individual receives tax relief on pension contributions that are taken out of their pay by their employer before tax is calculated, or
  2. relief at source – a pension scheme claims tax relief at the relevant basic rate from HMRC because individuals make pension contributions out of their earnings after tax has been calculated

Anyone who pays tax at rates higher than the basic rate can claim any extra relief but they need to do this themselves directly from HMRC

The government is concerned about the effects of the method of pension tax relief chosen by pension schemes that an employer has chosen for a low earning individual’s take-home pay. This means the call for evidence and changes made are to ensure that both administration methods operate efficiently and consistently for everyone and the benefits of saving into a particular pension is clear and concise.

In addition to this, the government realises that it can be complex for individuals to engage and understand their pensions and the tax relief they are given on their contributions, therefore, the call for evidence also wants to explore if any of the administrative processes unnecessarily complicate the understanding of pensions tax relief.

About Hayvenhurst Accountancy Services

Hayvenhursts are experts in all types of accountancy services and we can help you and your business with your pension administration queries and concerns. 

Our experts can help you with your personal and business finances incorporating pension administration tax relief advice. Whether it is your pension you have concerns about or your businesses pension scheme then we can help.  

We don’t just offer a standard accountancy service at Hayvenhursts. We get to know you and your business and we will work with you to ensure your business has all the accountancy and expert business services that you need both now and in the future. 

We use our highly trained and experienced team members and put together a team of experts that understand you, your business sector and your needs which results in a service which is bespoke to you. 

We work alongside you to identify tax relief, savings, tax breaks, improved cash flow and business efficiency through our defined and relevant accountancy and business services, establishing savings and opportunities which will improve your business’s short and long term prospects. 

From our offices in Cardiff, We offer a personal and professional service focused on the needs of each individual customer, business or family across South Wales and the whole of the UK.

Our service and reputation is built on our ability to understand your business plans for the short, medium and long term to ensure we are by your side and can support you when you need us. We have the expertise and experience to refine and distil key business decisions and possible outcomes and are always thinking, advising and refining your tax position as needed.

We take the time to work with you to understand your business, its needs, your needs and your business plans, and we offer the personal services of a local accountant with the infrastructure and experience of a large national accountancy practice.

Choosing an accountant has never been so important and it is an important and critical decision for you. You should take the time to find one which suits your needs, one you feel comfortable with, one you can trust and an accountant whose fees are fair and competitive.

We are proud that you can call us whenever you need accountancy help or advice without being charged every time you pick up the phone to us and this is a commitment we make to every one of our clients. We want you to feel comfortable to contact us whenever you need to and for whatever you want. You will always receive good, honest, sound and understandable advice, and we will work with you in the way that suits you; in person, on the phone or online.

Hayvenhursts Accountancy Services Offer:

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Contact us today and find out how we can help you with your Pension Administration Tax relief for you personally or for your business scheme. 

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