The government is seeking industry views on how to end the net pay anomaly in the pensions tax relief system which affects low paid earners.
The Treasury has published a 40-page call for evidence which presents the options being considered to address the difference in outcomes between net pay and relief at source pension schemes.
Members of relief-at-source pension schemes, who don’t pay income tax, are granted basic rate tax relief of 20 per cent on pension contributions up to £2,880 a year. In practice this means HMRC will top up a net contribution of £2,880 to a gross £3,600.
But these schemes are only accessible through a handful of companies. The more common net pay schemes do not offer access to such tax relief.
To align the tax treatment for those contributing to pension schemes with the same incomes but using different methods of tax relief, the government is exploring four methods.
The first method involves HM Revenue and Customs (HMRC) paying a bonus to lower earners who are in net pay schemes to put them in the same position as lower earners who are members of relief at source schemes.
Another proposal was for HMRC to apply a standalone charge to recover the top-up given under the relief at source method. This would see individuals subject to a stand-alone tax charge or the amount could be reclaimed from the pension scheme.
A third option explored by the Treasury is that employers could be made to provide two schemes for their employees, one net pay and one relief at source.
A more radical approach would be to require all defined contribution schemes to operate on a relief at source basis.
The call for evidence closes to responses on October 13, 2020.