As many as 1.75 million workers could be missing out collectively on around £60 million in tax relief on their pension contributions, a former pensions minister has warned.
The issue arises for workers who have been enrolled into a pension because they earn more than £10,000 per year but they are earning less than the income tax threshold – which now stands at £12,500 per year as of the new tax year which started on Saturday.
Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said those affected are low-paid and part-time workers who are most in need of boosting their pension pots.
He described it as a “scandal” that so many workers are missing out on money which could increase their pension savings.
It is thought that around three-quarters of these workers are women in low-paid or part-time jobs.
Royal London’s calculations were made following a freedom of information (FOI) response to Sir Steve from HM Revenue and Customs (HMRC), which gave estimates for 2016-17.
In 2016-17, 1.33 million people were estimated to be affected.
But since then, the personal allowance has increased alongside the continued roll-out of automatic enrolment bringing more people into workplace pensions – and so Royal London’s projections now put the figure at an estimated 1.75 million for 2019-20.
Sir Steve said that whether or not these workers benefit from pension tax relief depends on what sort of pension arrangement their employer has chosen.
In some arrangements, workers will benefit from tax relief where it is delivered through a method called “relief at source”, but other schemes may exclude tax relief for those earning under the tax threshold.
Sir Steve said that based on previous select committee evidence that each worker losing out was missing out on an average of £35 per year, this suggests a combined loss of around £60 million per year until the problem is resolved.
He said: “It is a scandal that so many low-paid and part-time workers are missing out on tax relief on their pension contributions.
“This is the group that most needs a boost to their pension savings.
“These new figures suggest that the scale of the problem is much bigger than previously thought.”