More than a million low-wage earners will finally get a pension increase – but not for another three years.
All savers should receive a tax break of 20 percent on pension contributions.
However, due to a quirk in the system, around 1.2 million employees – three quarters of them women – are not benefiting from this important increase.
All savers should receive a tax reduction of 20% on their pension contributions. But due to a flaw in the system, around 1.2 million employees are currently not benefiting from this important increase
The anomaly hits those earning less than the personal allowance of £ 12,570 – the amount of income you can pocket each year before paying tax – who are in what is known as a net payment arrangement system.
There are two ways to withdraw money from your salary and invest it in your pension.
A method known as withholding tax exemption gives you tax breaks whether or not you pay tax.
Your pension insurance company demands property tax (20 percent) from the state and adds it to your pension fund.
With the net payment, however, you pay the full amount into your pension and receive the relief back later through a deduction from your annual tax amount.
However, if you don’t earn enough to pay taxes, you won’t get anything back. That means you pay more for your pension.
In his household last week, Chancellor Rishi Sunak promised to fix the problem and give those affected an average of £ 53 a year on top of their pension.
But the new system will not come into effect until the tax year, which starts in April 2024. And you can only claim money back in the April 2025-2026 tax year.
Experts also criticized plans to oblige savers to reclaim the money themselves, which could mean that many will continue to lose.
Former Retirement Secretary Steve Webb of LCP consultancy said, “The proposed solution for low paid workers is chaotic, delayed and potentially ineffective.
“This is another answer to a problem with the pension tax relief system that needs to be systematically revised.”
Victoria Todd, Head of the Low Incomes Tax Reform Group, said, “The move suggests that those affected need to take action in order to receive a top-up payment. This can prevent people from accessing it.
“HM Revenue & Customs needs to make sure that the process is accessible, simple and as automated as possible.”
Baroness Ros Altmann, former Conservative Pension Minister, welcomed the change but added: “It is disappointing that nothing will change before 2025 and that by then these low earners will be paying more for their pensions than they should.
“But at least the end of this injustice is in sight. The pension provider should ask for the money back for them, otherwise many will not. ‘
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