Pensions Bulletin 2021/44 Budget Special

Our viewpoint

This Budget Special summarises and comments on announcements made in the Speech and accompanying documents which are of potential relevance to pension schemes and their members.

The Finance Bill will be published on 4 November.

Net pay resolution outlined – but only from 2024/25

The Government has responded to its July 2020 call for evidence (see Pensions Bulletin 2020/30) on the two main methods for administering tax relief on pensions – ie net pay arrangements and relief at source.  Under the current system, lower earners under net pay arrangements (ie those with taxable incomes below the personal allowance) can be disadvantaged compared to lower earners under the relief at source system.

None of the four methods exposed for consultation to address this issue are being taken forward as proposed.  Instead, the solution being introduced is a system of top-up payments made directly to low-earning individuals saving in pension schemes using net pay arrangements.  The top-up, which will be notified to the individual by HMRC, will reflect the basic rate of tax applicable, broadly 20% currently (19% in Scotland).  Due to significant changes required to HMRC’s IT systems to allow the PAYE reconciliation process to take place, the system will be introduced in respect of contributions made from 2024/25.

Notification of payments will be made to affected individuals after each tax year has ended.  This is to minimise the risk that HMRC would have to reclaim the top-ups if recipients later declared additional income.  The individuals will then need to provide HMRC with the necessary details for it to make the payment to them.

The Government estimates that around 1.2m low earners, 75% of whom are women, will be entitled to an average top-up worth £53 in 2025/26 as a result of the changes.  Draft legislation will be published in 2022 for inclusion in a subsequent Finance Bill.

The response also outlines proposals to modernise the relief at source system, after feedback that it was more costly to run than net pay arrangements.  HMRC will work closely with stakeholders to explore modern solutions to support the provision of information and declarations, provide faster in year payments to relief at source schemes and reduce errors.  The Government has set aside a total of £71m to modernise the administration of pensions tax relief and address the tax difficulties raised by the McCloud remedy (see Pensions Bulletin 2021/13).


Whilst it is clear that low earners currently saving through net pay arrangements may be frustrated by the delay in implementing this solution, the complexities involved are understandable.

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DC charge cap to be reviewed – to facilitate long-term investment

The Government is to consult before the end of the year on further changes to the charge cap for DC pension schemes, this time “to enable pension savers to benefit from better growth in their long-term investments”.

This consultation follows through on one of the recommendations of the Productive Finance Working Group (see Pensions Bulletin 2021/40) and is to consider amendments to the scope of the cap to “better accommodate well-designed performance fees and enable investments into the UK’s most productive assets, while continuing to protect savers”.


There is a strong sense of deja-vu with this consultation as the same thing was promised in the Spring Budget (see Pensions Bulletin 2021/09), with the DWP launching a call for evidence weeks later.  An announcement was promised before the summer recess, but it never came.  Quite what we will see before the end of 2021 is a mystery, but maybe this time there will be regulations of some sort.  It will be interesting to see how the DWP is able to square the need to protect members from high charges with the Treasury’s desire to facilitate investment in alternative asset classes.

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And in other news…

  • The National Living Wage and National Minimum Wage – the National Living Wage, currently £8.91 per hour, will increase by 6.6% to £9.50 per hour from April 2022.  The National Minimum Wage also increases by between 4.1% and 11.9% across the various bands
  • Universal Credit taper – the effective tax rate for those on low income will reduce from 63% to 55% by 1 December 2021. This means that earners will be able to earn more before they are no longer eligible for Universal Credit
  • Pension Credit – the Government has put back the date when the pensioner Housing Benefit will be merged to a new housing element of Pension Credit to 2025. This delay will enable the change to align with the full roll-out of working age Housing Benefit into Universal Credit

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