More than a million low-earners are losing an estimated total of £72m a year in pension perks because of a little-known anomaly that mainly affects women who work part-time. According to figures from HM Revenue & Customs, some 1.2 million people lost out on government tax relief top-ups in 2015/16 – around 800,000 of whom were women. Those involved are signed up to net pay schemes, where pension contributions are deducted from pay before tax is deducted.
With most pensions, the income tax deducted from the earnings is given back to savers but, with a net pay scheme, contributions are taken before tax, so a basic-rate taxpayer puts £1 into their pension and essentially saves 20p income tax they would otherwise have paid. However, people who earn less than £11,850 a year pay no income tax, thanks to the personal allowance, but may still have a pension eligible for tax relief. If they are in a net pay scheme, however, they get no relief. This is because, when money is taken for their pension, they have not saved any income tax – meaning £1 costs them 20p more than it does a basic-rate taxpayer.