Over 1 million people to get take home pay boost through their pensions – will you get it?

The Government has published legislation today that states that low earners who save through a Net Pay Arrangement (NPA) will get the same level of government top-up as those who use Relief at Source schemes. For NPAs, pension contributions are deducted before income tax is calculated. With the Relief at Source scheme, the income tax is calculated after. The Treasury claims that this will give 1.2 million people a pay boost. Of this, 200,000 will be set to see a £100 increase in their take-home pay.

 

The Treasury highlighted that the 200,000 people eligible for a top-up of £100 or more was based on the total number of people in the UK who contributed at least £500 annually into their NPA pension but have no tax relief on that contribution.

The average beneficiary will receive an extra £53 a year.

The Treasury states that 75 percent of those who will benefit will be women.

It also highlighted that 11 percent of people who would benefit would be based in the North West of England and Merseyside, and 12 percent would be in London.

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Since 2015, people saving through a NPA have had less take-home pay compared to similar earning savers who use a Relief at Source scheme.

This is because those using the latter type of pension scheme receive a 20 percent top-up from the government on their savings.Whilst those using NPAs receive tax relief at their marginal rate of zero percent.

Today’s legislation stated that it is to “rectify this anomaly” and comes into play in 2025.

However, the relief will only be applied to contributions made from 2024-25.

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In a statement Lucy Frazer, financial secretary to the Treasury said: “A quirk in our pensions tax system has meant that over a million low-earners have lost out on government top-ups to their pensions, resulting in comparatively less take home pay.

“We are correcting this injustice so low earners will get the same level of government support, no matter what type of pension they use.”

The Treasury stated that beneficiaries will receive their top-ups directly into their bank accounts once the change is in place.

HMRC will also notify those who are eligible for the top-up before the change happens.

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The Government has pledged to deliver the changes in full and on time and “will ensure the complex nature of the IT changes are ready to deliver the change”.

Jon Greer, head of retirement policy at Quilter said that the move was welcome however the “long-standing dithering” by the Government means that 1.2 million people will still have to wait for another three to four years to see the change.

Mr Greer said: “The Conservative party manifesto recognised the problem and pledged to solve the issue all the way back in November 2019.

“By the time it is eventually fixed, hundreds of millions will have been lost in pension funds by 1.2m lower earners, three-quarters of whom are women.”

Mr Greer explained that the net pay tax flaw means that some workers earning £12,570 a year or less could retire with a pot worth “thousands of pounds less than others” as the old scheme was a “perverse lottery”.

He added: “While it is laudable that the Government is actually tackling the problem, its solution remains imperfect, but at least better than the current situation, as it commits to paying a top-up contribution directly to the person’s bank account.

“However, this ultimately means they will lose out on potential growth by not having the money held in the pension fund and invested. 

“This solution also creates a risk of delay between the pension contribution being made and receiving the top-up.”

Mr Greer stated that it has been “a long road to get to this point” but there was “still some miles to go” before the quirk in the pension tax system is finally addressed.

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