Budget 2021: Low-income workers to get £53 a year pensions tax relief boost, Budget documents reveal
OVER 1.2million lower earners in the UK will get a valuable pensions tax relief boost from 2024, Budget documents reveal.
While Chancellor Rishi Sunak’s Budget announcement focused on alcohol duty, Universal Credit tapers and pay rises, buried in the Red Book there is an important shift in how pensions tax relief works.
Under the current system, millions of low-paid workers miss out on tax relief because of the way their employers’ choose to administer pensions contributions.
The changes are designed to fix that inequality and make sure that everyone benefits from a government boost when saving for retirement.
Under the new system, 1.2million low-paid workers will get an extra £53 a year on average paid into their pension and the government says 75% of the people affected are women.
The problem with the current system is employers have two options when it comes to pensions tax relief, one is called “relief at source”, while the other is called “net pay arrangement”.
Under Relief at Source, pensions contributions are taken from your post-income tax pay, but then the government adds back tax relief.
This means that everyone automatically gets 20% tax relief added to their contributions.
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Higher and additional rate tax payers are entitled to more, but they have to claim this back via the government.
Under the Net Pay system (NPA), pensions contributions are made from your pre-tax pay.
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Because you only pay income tax on the money you earn after pensions contributions, you end up paying less tax overall.
This works well for higher earners because they automatically get relief at their marginal rate of 40 or 45%.
But for people who earn less than £12,570, it means they don’t get any tax relief at all on their savings.
This also applies to people who have multiple jobs, but where each job earns less than the tax threshold.
This is because none of their income would have been taxed anyway, so they don’t benefit from the relief.
Under the new system, over a million lower earners will be able to get the tax relief.
The changes will come into force from 2024, with the relief being added from the following tax year.
Even though the new systems is supposed to be simpler, experts have raised concerns that low earners will not get the cash automatically, which means many will miss out.
More worryingly, the government’s own figures suggest they think most people won’t claim the bonus.
Phil Brown, director of policy at B&CE, provider of The People’s Pension, said:
“This is welcome news as this flaw has deprived more than a million lower earners – mostly low paid women – of a much-needed boost to their savings. But this fix will rely on HMRC contacting affected savers, who’ll need to be alert to claim their money.”
David Robbins, director at Willis Towers Watson, said: “Putting the onus on individuals to claim a top-up inevitably means that many won’t. The Government rightly says there is a lot of uncertainty about take-up, but estimates the cost at £15 million a year. This implies that under a quarter of the money available will actually be claimed.
The Budget at a glance:
- Beer prices cut from tonight as Rishi Sunak promises cheaper wine in alcohol duty shake-up
- Major boost for struggling pubs as business rates are SLASHED giving hope to British boozers
- Long haul holidays to get more expensive but Air Passenger Duty is slashed on domestic flights
- Wage boost for millions of public sector workers as pay freeze scrapped
- Minimum wage rises to £9.50 in bumper news for 2million Brits
- £435million crime blitz confirmed including help for rape victims and more CCTV
- Massive Universal Credit shake-up means 2million can keep an extra £1,000 a year
- Cost of pack of cigarettes to go up to £13.60 from 6pm TONIGHT as Chancellor hikes tobacco tax
- Free school meals for millions of pupils and boot camps for kids as Rishi Sunak unveils £3bn skills revolution
- Rishi Sunak announces £11.5bn to build 180,000 affordable homes including 160,000 new homes on brownfield land
- Fuel duty increase to be SCRAPPED in victory for The Sun’s Keep It Down campaign
There was also widespread criticism that the reforms will not take place for three more years.
In the response to the consultation, the government says this is due to technical hurdles and other commitments.
It said: “The time lag between announcement and implementation of this system is due to the complex nature of the IT systems changes required, as well as other ongoing HMRC delivery programmes.”
Steve Webb, partner at LCP said: “The proposed fix for low-paid workers is messy, belated and may well be ineffective. The problem of low-paid workers missing out on tax relief has been going on for a decade and will still go unfixed for another three years.
“And if it relies on people claiming these top-ups there is a real risk of non take-up. This is yet another sticking plaster response to a problem with the pension tax relief system which needs a systematic overhaul”.
Becky O’Connor, head of pensions and savings at interactive investor added: “This correction has been on the cards for some time – the anomaly has persisted for many years. However the 20% top up will be introduced from April 2024. There is no suggestion it will be backdated for those who have missed out in previous years.”
Finally, critics also felt the reforms didn’t go far enough to tackle to widespread inequality faced by young people, low earners, women, the self-employed and part time workers.
Despite a manifesto commitments to make changes to auto-enrolment reforms, the government has yet to deliver.
Limiting auto-enrolment to people over 22, who earn more than £10,00 from a single employer means that millions of people are saving nothing at all. Similarly, auto-enrolment does not apply to the self-employed.
Cyprian Njamma, client strategy director at SEI said: “We’re disappointed that auto-enrolment still continues to exclude many people with multiple jobs or who are self-employed. Many of those affected are women, adding to the pension gender gap. This is a lost opportunity to tackle inequality.”
Sunak also announced reforms to the National Minimum Wage this afternoon.
He pledged that on April 1, 2021, the NMW will rise to £9.50 an hour from the current rate of just £8.91.
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