More than one million lower paid workers stand to benefit as a longstanding anomaly will be corrected. It will correct a quirk in the pension taxation system which sees those on low incomes in “relief at source” pensions receive tax relief on pension contributions and those in “net pay” pension schemes, who do not.
It is estimated 1.2 million low earners will get higher pension contributions of £53 a year on average.
HM Treasury estimates this correction will cost £25billion between 2025 and 2027.
Becky O’Connor, Head of Pensions and Savings at interactive investor, said the current system “unfairly penalises” the low earners in the “net pay” workplace pension schemes.
This is because they don’t receive tax relief on contributions because they earn less than the personal income tax threshold.
However, other workers in “relief at source” schemes do get the relief.
She added: “The type of pension scheme someone is in is not generally something within an individual’s control, so lower paid workers in this type of scheme are missing out through no fault of their own.
“This correction has been on the cards for some time – the anomaly has persisted for many years.
“However the 20 percent top up will be introduced from April 2024.”
However, she pointed out that there hasn’t been any suggestion it will be backdated for those who have missed out in previous years.
Jon Greer, head of retirement policy at Quilter, said the commitment came after “years of dithering”.
He pointed out the problem won’t be fixed until the tax year 2025/26 and will only include contributions made from 2024/25. He said it would mean “these low earners will have forgone millions in pensions tax relief”.
“The Conservative party manifesto recognised the problem and pledged to solve the issue in November 2019,” Mr Greer added.
“By the time it is eventually fixed in 2024, almost £335million will have been lost in pension funds by 1.2 million lower earners, three quarters of whom are women.
“The net-pay tax flaw means some workers earning £12,570 a year or less could retire with a pot worth thousands of pounds less than others.
“This is a lottery depending on what tax system they end up in.
“Those in a net-pay pension scheme do not benefit from government tax relief into their pension pots, while other workers who are in a ‘relief at source’ scheme receive the top up.
“The government’s solution is imperfect, but at least better than the current situation, as it commits to paying a top-up contribution directly to the person’s bank account.
“This means they will lose out on potential growth by not having the money held in the pension fund and also there is a risk of delay between the pension contribution being made and receiving the top-up.
“While it is encouraging this solution has finally seen the light of day, the IT changes required to make this work won’t be implemented for some time and the issue of years of missed top-ups before 2024/25 will not be addressed.
“Furthermore, the paper suggests the payments could impact income-related benefits, such as Universal Credit.”