Low earners saving in a pension can end up in differing financial positions, dependent on whether contributions are collected under the net pay or relief at source (RAS) system. Under the net pay system contributions are deducted from the employee’s gross pay, so full tax relief is obtained immediately at the individual’s highest rate of marginal tax. Under RAS, contributions are deducted from the employee’s net pay and are treated by the administrator as being paid into the scheme after deduction of basic rate tax. The scheme administrator reclaims the basic rate tax relief from HMRC. Those paying above basic rate must reclaim the balance of their tax relief either through the self-assessment regime or directly from HMRC.
Members whose earnings are within the personal allowance will not receive tax relief if the net pay method is used because their earnings will not be subject to tax in the first place. However, they will receive a top up equivalent to basic rate relief if the RAS method is used. This difference has received growing publicity over recent years because the threshold for automatic enrolment is lower than the personal allowance, with the result that some individuals who are automatically enrolled into a scheme that uses the net pay system will not in practice benefit from tax ‘relief’ to which they would be entitled in a RAS scheme.
The Conservative 2019 manifesto promised to “look at how to fix this issue” and in July 2020 HMRC issued a Call for Evidence considering both this conundrum and the complications inherent within devolution whereby a different basic rate of income tax might apply to that within England. Alongside the Budget, the Government has announced how it proposes to take this forward.
Individuals making pension contributions to net pay schemes from 2024-25 will be eligible to claim a top-up. These will be paid after the end of the relevant tax year, with the first payments being made in 2025-26 and continuing thereafter.
The process for claiming and paying the top-ups on contributions to Net Pay Arrangement (NPA) schemes in 2024-25 will be as follows:
A low-earning member in an NPA scheme will be worse off initially than under a RAS scheme and the requirement to make a claim, coupled with the (for many members) small adjustment may lead to many not claiming, particularly if that might impact entitlement to social benefits. It would appear from the government’s policy costings that it expects less than 25% of eligible members to make a claim.
The government’s 2020 Call for Evidence had considered forcing all defined contribution (DC) schemes to use RAS, which would have resulted in all higher-rate taxpayer members of such schemes (who pay employee contributions) having to make a claim. It would also have introduced a requirement for considerable change for DC schemes using Net Pay, potentially across IT systems, processes, plan design and administration.
The government says that it is open to discussing with the Scottish Government the implications of the lower starter rate tax band of income tax (19%) in Scotland.
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In the Chancellor’s speech to the house, the only reference to pensions was his announcement that “we will consult on further changes to the regulatory charge cap for pensions schemes unlocking institutional investment while protecting savers”. This was made under the premise that “Innovation comes from the imagination, drive and risk-taking of business”. The Budget documents add that this consultation should start before the end of the year. The issue was consulted on in March 2021, and tweaks made to the legislation with effect from 1 October 2021. However, in September 2021, the Productive Finance group issued a report with a number of recommendations aimed at increasing DC schemes’ investment in less liquid assets including further work on appropriate methodologies to accommodate performance fees within the charge cap. It seems reasonable to expect further refinement on the operation of the cap in the coming proposals, rather than amending its actual level of 0.75% which the Government committed to keeping in January.
The challenge has always been to balance charges within the cap with how fees generated by such funds are charged. To that end the Budget material says that “ The consultation will specifically consider amendments to the scope of the cap to better accommodate well-designed performance fees and enable investments into the UK’s most productive assets, while continuing to protect savers.” The challenge will be in creating something simple yet manageable.
Related to this, the FCA recently confirmed the rules for long term asset funds (LTAFs). These are a new category of authorised open-ended investment funds designed to facilitate investment in long-term, illiquid assets such as infrastructure. The Handbook rules and guidance for LTAFs, including a mandatory notice period for redemption of at least 90 days, will come into force on 15 November 2021. The FCA states that the product will be considered a success if LTAFs are launched and DC pension schemes choose to invest in them.
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No changes have been announced to the AA.
The standard AA remains at £40,000 and the money purchase AA (applicable to defined contribution (DC) savings where a person has already accessed some DC savings flexibly) at £4,000. The rate at which the AA reduces (the tapered AA) and the thresholds from which this takes effect are similarly unchanged. Individuals with threshold income of at least £200,000 have their AA reduced by £1.00 for every £2.00 that their adjusted income (this includes employer contributions to pension schemes) is over £240,000. Once adjusted income reaches £312,000, no further taper is applied, delivering a minimum AA of £4,000.
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No changes have been announced to the LTA.
Having already announced in the March Budget that the LTA would be frozen at its 2020-21 level – £1,073,100 – until 2026, an announcement of further change so soon afterwards would have played into the hands of those who criticise the government of constant tinkering. There was none and thus the LTA remains at £1,073,100.
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A draft of the Finance Bill 2021-22 was originally published in July 2021 and the government has confirmed that the Bill itself will be published on 4 November.
This is expected to include measures to:
The normal minimum pension age (NMPA) will rise to 57, from 2028. The draft legislation also included provision to introduce a protected pension age regime for certain members who have unfettered rights to an earlier pension age. That protection regime was also proposed to be maintained following a transfer of pension rights, subject to certain conditions being met. However, there appeared some gaps/flaws in the original drafting, which would result in a protected pension age being denied for any transfer that took place before 5 April 2023. It is hoped that this will be corrected in the Finance Bill.
A member who has a liability for an annual allowance (AA) charge can ask the pension scheme to pay (some or all of) the AA charge, in certain circumstances. The scheme must reduce the member’s benefits to reflect the value of the charge it has paid. This facility is known as “Scheme Pays” and the deadlines for reporting and making payment of the AA charge under it are to be extended, where an individual has an annual allowance charge arising from a “retrospective change of facts”. The changes will have effect from 6 April 2022 but will be retrospective from 6 April 2016. Again, there were some flaws in the draft legislation which would have curtailed the payment deadlines in some circumstances and we hope these will be addressed.
This extension flows from the government designing a remedy for the discriminatory treatment (on the ground of age) found in the 2015 public sector pension reforms. However, it extends to all members.
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The taper rate in Universal Credit will be reduced from 63% to 55% no later than 1 December this year. This means recipients will lose 55p of Universal Credit for each £1.00 of take-home pay, rather than 63p as now.
One consequence of this is that the incentives to save in a pension will be slightly weaker for affected employees than they are today:
This still amounts to an effective 64% rate of tax relief – more than the much better known 40% relief enjoyed by higher rate taxpayers, though Universal Credit recipients will typically be able to afford much smaller contributions.
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The Budget confirms the earlier announcement (with legislation now making its way through Parliament) that the State Pension increase will not use the Triple Lock for April 2022 increases but will increase by the higher of CPI and 2.5% – with the earnings-related component suspended due to its post-pandemic spike. It is widely believed that this means that the new State pension and basic State pension will increase by 3.1% (September 2021 CPI), but this hasn’t been confirmed.
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The government recently legislated for the new 1.25% Health and Social Care Levy to apply from April 2022 taking the main rate for employee NICs to 13.25% and for employers to 15.05% before the rates revert and it is captured as a separate levy from 2023. Unlike NICs, the separate levy will also apply to those in employment over State pension age. There were no further changes to income tax rates or the National Insurance contribution percentages.
In the March Budget, the Chancellor announced that income tax allowances would be increased in April 2021 and then frozen until 2026.
The Chancellor announced in this Autumn Budget that the government will, as usual, use the September Consumer Prices Index figure (3.1%) as the basis for uprating National Insurance limits and thresholds – other than the Upper Earnings Limit and Upper Profits Limit which will be maintained at 2021-22 levels, in line with the higher rate threshold for income tax.
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Inflation is heading upwards, but the Office for Budget Responsibility expects this to peak at 4.4% in Q2 2022. The Chancellor confirmed that the government continued to be committed to “price stability”. Consequently, he had written to the Bank of England confirming the 2% consumer price inflation target.
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