How to Maximise Lower Earners Pension Savings

May 2021
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Since 2012 pension scheme membership has risen from 55% to 87% of the workforce with women, the under 30s and those earning up to £30,000  accounting for most of this growth.1 This vast improvement in retirement provision can be attributed to the success of auto enrolment into pension schemes. Inertia has   played its part in this but the simple message that if the employee pays in 4%, they can double their savings with 3% from the employer and 1% in tax relief making 8%, has a wide appeal. Many employers offer more than this minimum.

Lower Paid Missing Out 

However, for 1.3 million lower paid workers this is not the deal they are getting, due to the way in which deductions from their pay are collected, leaving them missing out on tax relief.1 Those affected are employees with income below the personal allowance for income tax of £12,570, where scheme deductions are made pre-tax calculation, through a net pay arrangement or where salary exchange is offered.  With income tax allowances frozen until 2026 their numbers are likely to grow. 

Call for Change

Former Pensions Ministers Ros Altmann and Steve Webb have campaigned for change to ensure that lower paid workers benefit from basic rate tax relief added to their pension savings. A Treasury Consultation in 2020 has so far yielded no change.  It favoured moving all defined contribution schemes to relief at source (RAS). While this would help the lower paid it could disadvantage those paying tax above the 20% rate.

 RAS gives all scheme members 20% relief automatically, but higher and top rate taxpayers need to individually claim marginal rate relief of 20% or 25% (21% and 26% in Scotland) from HMRC. This could result in less relief for some higher and top rate payers as marginal rate relief is currently under claimed by those using RAS, according to HMRC. 2    It could also mean an end to salary exchange schemes which offer both employer and employee national insurance savings as well as income tax relief. 

A Better Solution  

 There is a simple solution which employers can adopt now to give all their staff tax relief at the appropriate rate automatically. This is to offer the lower paid members a RAS scheme, where the pension provider collects a 20% credit from HMRC which is added to the member’s pot. Most pension providers will pre- fund the tax subsidy, so that it is automatically invested in the pension pot together with employer and employee contributions. Alternatively, the 20% tax credit can be applied by the provider once received from HMRC.

Helping lower paid staff to a better deal does not need to be at the expense of the higher paid members who get all their relief at the appropriate rate when using salary exchange or net pay.  A relief at source scheme can be offered alongside a salary exchange or net pay scheme.  

Moving employees between schemes, when their pay takes them above or below the personal allowance, is a simple matter with technology, and has been used successfully by several employers where part time working is common. 

J R Rix, an independent group of companies, whose activities range from domestic fuel distribution and manufacturing to shipping and property development, have adopted this approach whilst running a salary exchange and RAS scheme for their 700 staff. “Our staff appreciate that we have fine-tuned the way that tax relief is obtained, so that all colleagues get the maximum tax relief boost to their retirement savings, without them having to worry about it. We are pleased with the attention and service we have received from LEBC Group in guiding us on this” said Mr Rob Wilde, J R Rix & Sons’ Group Finance Director 

To review the value and tax efficiency of the pension schemes offered to your staff please use the live chat facility, email, call 0800 055 6585 or your usual LEBC consultant. 

Kay Ingram                                    
Public Policy Director                                    
May 2021

1.    HM Treasury Pension Tax Relief Administration – Call for Evidence July 2020. 
2.    Registered Pension schemes – cost of tax relief HMRC December 2019

All information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation, are subject to change and will be based on individual circumstances, 

The Financial Conduct Authority does not regulate taxation advice. 


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