Some pension savers have been incorrectly receiving tax relief twice on their contributions or not receiving relief at all, HMRC has admitted.
In a joint article written by HMRC and The Pensions Regulator (TPR), the two organisations revealed that they were aware of issues with giving tax relief to scheme members and attributed the problem to an error in the way that the relief is operated.
There are two ways that relief is given: through the relief at source method or by the net pay arrangement (depending on the set-up of the pension scheme).
Commenting in The Financial Times, Mike Lacey, partner at Bowman Pension Consulting, explained that this wasn’t really an HMRC error. “It's an error by whoever is responsible for managing the pension scheme, caused by lack of knowledge.
“I suspect this is a considerably more widespread issue than HMRC realise. I first came across it at least a decade ago. Should HMRC try to reclaim the additional tax relief, some employers will face very angry staff.”
In schemes that operate relief at source, members make their contributions from their pay after Income Tax has been deducted and the scheme administrator claims the basic rate relief back from HMRC and pays this into their pension scheme on the member’s behalf.
In some cases, member contributions are being paid from their salary before tax and National Insurance (NI) have been deducted. Basic rate tax relief on these contributions is then being claimed, resulting in the member getting too much tax relief.
In schemes that operate the net pay arrangement, members get tax relief by making their contributions before their pay is taxed so the member gets the tax relief straightaway. However, HMRC has revealed that some member contributions have been made after tax and NI has been deducted. As result, the member will not have received the right amount of tax relief.
Lacey believes that the confusion around this issue is: “Another reason to fundamentally review the whole subject of how tax relief is given on pension contributions.”
The article from TPR and HMRC urges employers to work with TPR to ensure they have sufficient systems and processes in place to monitor and report scheme contributions in line with its Codes of Practice and Guidance. It also encouraged employers to contact HMRC if they believe the wrong amount of tax relief has been given.
