Interactive Investor

Pensions boost for 1.2 million low-paid workers

Government corrects longstanding anomaly.

27th October 2021 14:12

Rebecca O'Connor from interactive investor

Government corrects longstanding anomaly.

As part of today’s Budget announcement, the government is introducing a 20% top-up for low earners in ‘Net Pay’ pension schemes from April 2024.

This corrects a longstanding inequity between those on low incomes in ‘relief at source’ pensions, who receive tax relief on pension contributions and those in ‘net pay’ pension schemes, who do not.

The government estimates that 1.2 million low earners will benefit from slightly higher pension contributions as a result – an average of £53 a year.

The Treasury estimates the correction will cost £25 million between 2025 and 2027.

Becky O’Connor, Head of Pensions and Savings, interactive investor“The correction of the so-called net-pay anomaly puts right a quirk of the pension taxation system that unfairly penalises low earners saving in ‘net pay’ workplace pension schemes, whereby they do not receive tax relief on contributions because they earn less than the personal income tax threshold, whereas other workers in ‘relief at source’ schemes do get the relief.

“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% top-up will be introduced from April 2024. There is no suggestion it will be backdated for those who have missed out in previous years.”

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