There has been much criticism of net pay arrangements over the past year. Malcolm Delahaye says the problem is really about poor pensions policy and the clunkiness of RAS
I wonder if the level of outrage publicly expressed over net-pay arrangements is fuelled by a misplaced belief that the anomaly reduces the size of the pension payout.
It seems it isn't generally understood the actual difference relief-at-source (RAS) arrangements make for non-taxpayers is higher take-home pay not lower pension contributions. The figures speak for themselves (see table).
The discriminatory tax basis goes back to 2006 when the restriction stopping people getting tax relief on personal pension contributions higher than their taxable salary was removed - allowing people to pay up to £3,600 into a personal pension and claim ‘tax relief' to reduce the cost, even if they have no tax to be relieved of.
The 2006 change was introduced as an incentive for those not in a workplace scheme - non-workers, the low paid, self-employed and children - to save. RAS was, and is, the only way of delivering this subsidy by way of the pension tax relief system.
If you paid no tax, but were a member of an occupational pension scheme, the tax subsidy was not intended for you - you didn't need to be incentivised, you had already joined a scheme, or soon would be compelled to join under auto-enrolment (AE), plus you were incentivised by free money contributed by the employer. A far more generous incentive.
This policy is clearly discriminatory. Workplace personal pension contributions are no different from occupational scheme contributions, and this anomaly should be sorted out - but I would question any suggestion that net pay should be replaced by RAS or that the PAYE system should be altered to accommodate a negative tax charge.
The RAS anomaly was an unintended consequence of an ill-thought-through piece of tax legislation. As such, I suggest the anomaly is addressed by removing the arcane and inefficient system of RAS being enforced on personal pension schemes that are AE schemes.
There is no argument, as far as I can see, that justifies maintaining the prohibition on net pay operating for any scheme for workers taxed under PAYE. The only enforced operation of the rule is necessary for the same reason it was introduced in the first place: to provide the means of giving tax relief for those not in employment and subject to PAYE.
I doubt anyone would try to support RAS as an efficient and frictionless means of administering tax relief - it has no merits apart from granting an unintended benefit to the low-paid and allowing unquantified amounts of higher-rate tax relief to go unclaimed as a result of its clumsy processes.
All qualifying schemes could operate under a harmonised system if they all operated frictionless net pay for both occupational schemes and personal pension schemes.
To ensure no detriment in terms of loss of take-home pay, a one-time uplift could be given to RAS non-taxpayers when the personal allowance goes up. Thereafter, if you pay no tax you are not given relief for something you didn't pay in the first place.
If the low paid are to be advantaged in terms of take-home pay it should be a conscious political decision applicable to all, not an accidental anomaly of trying to incentivise pension saving for those not fortunate enough to be in a workplace scheme.
Malcolm Delahaye is founder of the Supertrust UK Master Trust
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