OVER 1.2million lower earners in the UK will get a valuable pensions tax relief boost from 2024, Budget documents reveal.
While Chancellor Rishi Sunak's Budget announcement focused on alcohol duty, Universal Credit tapers and Innovation investment, buried in the Red Book there is an important shift in how pensions tax relief works.
Under the current system, millions of low-paid workers miss out on tax relief because of the way their employers' choose to administer pensions contributions.
The changes are designed to fix that inequality and make sure that everyone benefits from a government boost when saving for retirement.
Under the new system, 1.2million low-paid workers will get an extra £53 a year on average paid into their pension and the government says 75% of the people affected are women.
The problem with the current system is employers have two options when it comes to pensions tax relief, one is called "relief at source", while the other is called "net pay arrangement".
Under Relief at Source, pensions contributions are taken from your post-income tax pay, but then the government adds back tax relief.
This means that everyone automatically gets 20% tax relief added to their contributions.
Higher and additional rate tax payers are entitled to more, but they have to claim this back via the government.
Under the Net Pay system (NPA), pensions contributions are made from your pre-tax pay.
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Because you only pay income tax on the money you earn after pensions contributions, you end up paying less tax overall.
This works well for higher earners because they automatically get relief at their marginal rate of 40 or 45%.
But for people who earn less than £12,570, it means they don't get any tax relief at all on their savings.
This also applies to people who have multiple jobs, but where each job earns less than the tax threshold.
This is because none of their income would have been taxed anyway, so they don't benefit from the relief.
Under the new system, over a million lower earners will be able to get the tax relief.
The changes will come into force from 2024, with the relief being added from the following tax year.
Sunak also announced reforms to the National Minimum Wage this afternoon.
He pledged that on April 1, 2021, the NMW will rise to £9.50 an hour from the current rate of just £8.91.
More to follow…
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