CHANCELLOR Philip Hammond looked pretty pleased with himself when he announced in his Budget that changes to income tax bands due to come into force in 2020 will now take effect from April next year.
And why not? After all, by increasing the personal allowance on which no tax is paid from £11,850 to £12,500 – a sum that will also apply in Scotland, which otherwise sets its own tax bands – the Chancellor has enabled even more of the UK’s lowest earners to stop paying tax completely.
And, by increasing the higher-rate earnings threshold south of the Border from £46,350 to £50,000, he not only played to the Tory-voting crowd but, with the Scottish higher rate of 41% kicking in at £43,430, created a headache for the Scottish Government too.
However, while Mr Hammond used the changes to crow about delivering “a tax cut for 32 million people” and taking “1.7 million out of tax altogether” since 2015, his failure to also look at pension tax reliefs in the Budget means the measures have actually extended a disadvantage that affects only low-paid workers.
All UK earners are entitled to pension tax relief, meaning that for every £1 a basic rate taxpayer saves into a pension the Government effectively adds 25p by not collecting the tax due on the portion of earnings saved. This rate of relief also applies in Scotland (which in addition to the 20% basic rate has bands of 19% and 21%) and for those earning less than the basic rate threshold.
In most workplace schemes pension contributions are deducted after tax and the Government sends the relief back to be added to employees’ savings. In net-pay schemes, however, which are typically the kind of pooled vehicles used by multiple small employers, contributions come out before tax is paid, with savers having to claim the relief back at their marginal rate.
While this puts those paying tax at the Scottish 19% starter rate at a slight disadvantage, the bigger issue is that those who earn too little to pay any tax at all – which from April will be anyone earning up to £12,500 – have no entitlement to the relief.
Pensions expert Ros Altmann, who prior to the Budget campaigned for Mr Hammond to address the anomaly, said that the Chancellor has not only failed to look at the issue but by raising the personal allowance has actually exacerbated it.
“Although it is welcome, the rise in the personal tax threshold to £12,500 does have a downside,” she said.
“Yes, it should help reduce opt-out rates for auto-enrolment, but it will bring more people into the zone in which they have to pay 25% extra for their workplace pension.
“Anyone who earns below the personal tax threshold is entitled to basic rate tax relief – equivalent to a 25% bonus on their pension – but they cannot get that money if their employer uses a net-pay scheme or salary sacrifice.
“This injustice affects low earners, mostly women, and needs to be urgently remedied.”
Anne Fairpo, chair of the Chartered Institute of Taxation’s Low Incomes Tax Reform Group, said that with employees’ minimum auto-enrolment contributions also set to rise in April, from 3% to 5%, the problem will grow.
“Low earners in net-pay arrangement pension schemes are being hit with a triple whammy – no action to correct the tax disadvantage, more people affected by it and a bigger impact,” she said.
“The higher personal allowance and increased contribution rate taken together mean that the minimum pension contribution for someone earning £12,500 in 2019/20 will now cost them £323.40 rather than £258.72 – because they will no longer get any tax relief to help make up their contribution amount.
“This is a difference of £64.68 – a week’s food shopping for a family or a tank of petrol for the family car.
“This means that the Chancellor’s assertion that the personal allowance increase translates into £130 more in the pockets of millions of hard working people, even on a basic level, will be wrong in many cases. While he may be giving £130 with one hand, he is taking away up to £64.68 with the other.”
For Jon Greer, head of retirement policy at wealth manager Quilter, failing to address the net-pay issue was not only a missed opportunity for the Government, it showed that the Chancellor’s claim we are in “an economy that works for all” is flawed.
Source : HeraldScotland