The pension industry has urged the government not to address the net wage anomalies issue after failing to mention it in the Tax Day announcements.
Industry experts once again urged the government to address the issue to ensure that all workers receive the pension tax break they deserve.
The net wage anomaly occurs in the pension tax relief system and means that low earners miss out on a 20 percent increase in their pension contributions if their system has a net wage regime, as is the case with most pension funds in the market.
The Conservative Party has included the issue in its election manifesto, but has not yet addressed it.
Tom Selby, senior analyst at AJ Bell, said the government urgently needs to fix this due to a lack of low paid workers and women.
Selby said, “The Conservative Manifesto promised to address this issue and to date nothing has been done. If this is not addressed with urgency, not only will low earners be short-circuited on tax breaks, but there is also a risk of undermining confidence in automatic enrollment and broader retirement provision.
“The main focus here must clearly be on ensuring that all employees receive the pension tax relief they are entitled to, although policymakers will also be careful not to add additional burdens to employers who currently operate net wage systems for automatic registration.”
Steven Cameron, Aegon’s Pension Manager, agreed. He said, “There are a growing number of low-wage workers in ‘net-wage’ pension schemes who, because they do not pay income tax, do not get the 20 percent tax break their counterparts receive on ‘relief at source’ schemes standard.
“We urge the Treasury Department and HMRC to do what is right for those who are currently lacking their pension tax relief entitlements.”
But he also pointed out a problem with the discharge of sources for higher earners. “Within pensions, higher and additional taxpayers who are in ‘relief’ regimes must separately reclaim relief above property tax, and there is some evidence that many forget,” he said.
In July, the Department of Labor and Pensions launched a 40-page call for evidence presenting the options being considered to address the disparities in net wage outcomes and relief in source pension schemes announced in the 2020 budget .
To reconcile the tax treatment for those contributing to pension systems with the same income but different methods of tax relief, the government is examining four methods.
One method is for HM Revenue and Customs to pay low earners who are in net wage systems a bonus to put them in the same position as low earners who are members of source relief schemes.
Another suggestion was for HMRC to charge a standalone fee to recover the recharge granted under the Relief-at-Source method.