Pension savers losing money every year due to tax anomaly – are you affected?

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Thérèse Coffey addresses state pension underpayments

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The problem has been left unresolved since it first became apparent back in 2016, causing over one million Britons to miss out on some of their hard-earned pension savings. This has prompted calls for the issue to be addressed at the upcoming Autumn Budget.

The pension net pay issue has cost low earners hundreds of millions of pounds in lost pension funds, according to new calculations from wealth management company, Quilter, due to what they call “years of government dithering”.

Low earners have missed out on £181million in lost pension funds since November 2019, when the Conservative party manifesto recognised the net pay problem and promised to fix the issue.

Going back further, these workers have lost £313million since the issue was first raised in Parliament in March 2016 when the government’s pensions minister in the Lords said the situation was “not acceptable”.

An anomaly in the pension tax relief administration system means low earners who earn above the automatic enrolment trigger but below the personal allowance do not receive Government tax relief on pension contributions if their employer has put them in a ‘net pay’ pension scheme.

However, workers in ‘relief at source’ pension schemes do receive the top up and have not been impacted by this problem. In the 2020/21 tax year 1.5 million people lost £62.60, with the same number of people losing £63.64 the previous year.

Some 1.22 million people lost money due to this issue when it first occurred for the 2015/16 tax year, jumping to 1.33 million people for the following three tax years between 2016 and 2019.

The total amount of money lost due to this unresolved problem has also increased over time. Pension savers missed out on £11.65million for the 2015/16 tax year, rising slightly to £13.77million and £14.96million the following two years.

The value of lost pension savings then exploded, soaring to £46.43million for the 2018/19 tax year and up near £100million in each of the last two years. Savers lost £95.46million in 2019/20 and £93.9million in 2020/21.

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Quilter’s data estimates that 1.5million people will once again miss out on some of the pension savings they are entitled to in the 2021/22 tax year unless the issue is fixed, meaning each affected person loses £63.30 while a further £94.95million is lost in total.

The Government issued a consultation paper in July 2020, but 14 months later, no response has been provided by the Government and no solution has been confirmed as of yet.

Women appear to lose out most as a result of what Quilter calls “Government inaction” as they account for approximately two-thirds of the 1.5 million people impacted.

With automatic rights to pensions recently granted to Uber drivers, these workers could also be impacted as the company announced drivers will be automatically enrolled into a pension scheme which operates a net pay arrangement.

Quilter has urged the Government to “prioritise this injustice and provide the long overdue remedy at the earliest opportunity”.

Ian Browne, retirement expert at Quilter commented on the findings and criticised the Government for a lack of action on the net pay issue impacting Britons and their pension pots.

He said: “The Government has sat on its hands for far too long now, the result of which being that low-earners have missed out on valuable pension contributions to the tune of hundreds of millions on pounds.

“The inaction on the net pay issue is collectively costing low-earnings just shy of £100million each year. Since the government first promised to ‘fix the issue’ in November 2019, £181million has been lost in pension funds that would have made a big difference to people’s pension pots over time.”

The Chancellor of the Exchequer, Rishi Sunak is set to present the Autumn Budget on October 27, as Britons wait to find out how the announcements will impact their finances. Mr Browne sees this as an ideal opportunity for the Government to tackle the net pay issue.

He said: “It may not be the most glamorous of issues, but if the Chancellor is truly committed to helping working people and truly committed to ‘levelling-up’, then he must start by ending the two-tier pension system that leaves many lower-earners worse off.

“The need to come up with a solution takes on renewed importance now Uber drivers are to be enrolled into a pension scheme for the first time, but due to the nature of their work may earn below the personal allowance.

“The government must stop dithering and end the net pay delay, ideally at the Budget in a few weeks’ time.”

Express.co.uk has contacted HM Treasury for comment.

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