Govt inaction criticised over pension tax anomaly

The government’s lack of progress towards rectifying an estimated 1.5 million or more low-income workers having to pay a 25% penalty for their pension savings has been branded “disappointing” by the Low Incomes Tax Reform Group (LITRG).

This issue can cost those affected around £65 a year due to the way their employers’ pensions schemes operate.

The government has today published its responses to a number of tax consultations although the LITRG highlighted that it has yet to respond to a call for evidence on pensions tax administration. This is despite the call for evidence being concluded longer ago than several other consultations on which the government has now responded.

Many pension schemes provide a government-funded savings incentive, in the form of tax relief, through a system called relief at source, enabling lower earners to get a taxpayer-funded contribution to their pension automatically.

However, other pension providers add this money through a net-pay arrangement. This works well for most people, but not for those who earn less than the £12,570 threshold for paying income tax, with these people missing out on the taxpayer-funded contribution to their pensions they would otherwise be entitled to and end up paying it themselves.

“This is an unacceptable penalty to pay for the same pension savings as their counterparts for whom their employer has chosen to use a relief at source scheme,” commented LITRG senior technical manager, Kelly Sizer.

“Given this issue has been known about for several years, the cumulative cost is mounting and continues to do so the longer the government delays in implementing a solution.

“It is therefore disappointing that the government has not taken the opportunity presented by today’s tax ‘Legislation day’ to respond to the call for evidence it published a year ago following its manifesto commitment on the issue.

“While there have understandably been other priorities over the last 18 months, we now urge the government to take action to deal with this injustice as soon as possible.”

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