Budget pension tax relief fix for low-paid “messy, belated and likely to be ineffective” – Steve Webb, LCP

Under the current system of pension tax relief, non taxpayers whose pension scheme delivers tax relief through the ‘relief at source’ (RAS) system still get tax relief, but those who pension scheme uses the ‘net pay arrangement’ (NPA) do not. The Chancellor has today announced that for the tax-year 2024/25 onwards, workers in NPA schemes will be able to claim a top-up roughly equivalent to the tax relief they would have got had they been in a RAS scheme. HMT estimates that this will affect around 1.2m workers, predominantly women, and will benefit them by an average of around £53 per year.

Although action is welcome, potential issues include:

• The problem has been going on at scale since the start of automatic enrolment a decade ago, yet will still not be resolved for another three years;
• If it is dependent on workers claiming a top-up, there is a real risk that there will be massive non take-up;
• It is yet another complexity and piecemeal change to the system, rather than coming up with a review of pension tax relief as a whole and addressing the whole system in one go.

Commenting, 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”.