NPSS tax relief

Milarky

This old article by Steve Bee (who ought to know his onions) from Feb 2006 seems to suggest that the employee's 4% contribution in the 4-3-1 make up of the proposed NPSS would include tax relief at the basic rate. He doesn't say it directly but according to him:

For someone on average earnings with, say, band earnings of £21,000, the pension contribution they would be in for if they stay enrolled in the NPSS would be £655 a year. That’s the post-tax pay cut they’d have to take to trigger off the 3% contribution from their employer. The employer’s compulsory contribution would be £630 a year.

£630 is 3% of £21,000 whereas £840 would be 4%. You only get to '655' by multiplying 840 by 78%

I was not aware of this previously. I had assumed that the 'offer' being made was that the employee would pay '4 percent' and that the government contribution of 1% represented the tax relief (at 20 percent - what basic rate tax will be from 2008) on this. But Bee's article reworked would have the employee paying 3.2% from net income, 0.8% tax relief, 3% employer contribution and 1% government 'top up' - making it considerably more valuable.

[Is he correct?]

It doesn't look like this at all in the Second Report which makes it quite clear that the government 1% is the tax relief

Recommended way forward:

2. Minimum default contributions set at about 8% of the earnings above the Primary Threshold and below the Upper Earnings Limit:

– 4% out of individual post-tax earnings;
– 1% paid for by tax relief; and
– 3% compulsory matching employer contribution.

[executive summary page 20]

dunstonh

The contribution limits initially discussed in 2006 were played around with a few times. I wouldnt rely on any article from 2006 as it will be out of date. Also remember that in 2006, the Govt was aiming for a 2010 start date. That is now 2012 but it could still go back (and probably will given the track record of this Govt regarding the Finance Acts).

AFAIA, the last reports suggested there will be no tax relief on NPSS as the Govt 1% is effectively the tax relief. However, this leads to this miss match that higher rate taxpayers will be worse off with an NPSS through the employer than a stakeholder or personal pension through the employer.

I would recommend that any employee that is close to higher rate or is higher rate and has an employer that has no occupational pension scheme to start getting into dialogue with the employer and encourage them to introduce a group personal pension instead of the NPSS. As long as the employer pays 3% into it, they dont have to offer the NPSS.