Low earners with taxable incomes below £12,570 (the Personal Allowance) can have different levels of take-home pay depending on how their pension scheme is administered.
Those in schemes using relief at source receive a 20% top-up on their pension saving (even though they pay no income tax) whilst those in schemes using net pay arrangements receive tax relief at their marginal tax rate, which in this instance is 0%. The effect is that low earners in schemes using net pay arrangements have less take-home pay than they would if they were saving into a scheme that uses relief at source.
The government has published new proposed legislation to rectify this anomaly, which involves adding a new Section 193A to the Finance Act 2004. The proposed legislation is intended to come into force on 6 April 2024.
The duty will be on HMRC to determine eligible individuals (i.e. those in a net pay pension scheme and whose total taxable income is below the Personal Allowance) and make top-up payments directly to their bank account (individuals will need to confirm or provide their payment details). The measure will come into force for the tax year 2024/25 – this is the tax year in which the eligible individuals will be identified, with payments to be made as soon as possible after the tax year in which the contribution is paid. The payments will be chargeable to income tax, although they may not push the individual’s salary above the Personal Allowance.
It is estimated that the new legislation will have a positive impact on 1.2 million individuals by providing the top-up payment and the change has been well received by industry experts.