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Nearly one million low earners could receive a payment from HMRC after missing out on pension tax relief because of the way their workplace pension is set up.
The issue – explained in a recent bulletin published by HMRC – stems from administrative differences in how workplace pension schemes process tax relief.
To fix this, the tax office is writing to affected savers and inviting them to claim what has been termed a 'low earners pension payment.'
Here Which? explains why some people have missed out, how much you could receive and what you need to do to claim.
Nothing has technically happened to your pensions. The issue relates to how your workplace pension scheme is set up.
When you pay into a pension, the government normally gives you tax relief on your contributions, meaning some of the money that would otherwise have gone to HMRC goes towards your pension instead. How you receive this depends on how your workplace pension scheme is set up.
Tax relief on workplace pension contributions is processed in two ways:
If you are a low earner, you can end up worse off under a net pay arrangement. This is because automatic enrolment kicks in at £10,000 per year, while workers earning between £10,000 and £12,570 (the personal allowance) do not pay income tax.
If you don't pay income tax, reducing your taxable income through a net pay arrangement won't give you a tax saving. Unlike relief at source, there is no separate top-up into your pension, meaning you can miss out.
Since employees cannot choose their workplace pension structure, successive governments have recognised the problem as unfair. Around three-quarters of those affected by this are believed to be women.
To fix this, the government introduced a new policy following years of campaigning by the Net Pay Action Group, designed to give those affected a payment that makes up for the tax relief they missed out on.
The government legislated for the change in 2022, with the new system applying to pension contributions made from the 2024-25 tax year. Payments for that first year were subsequently delayed until 2026.
If you earn £12,000 and contribute £100 to a net-pay scheme, your take-home pay falls by the full £100. That's because you're already below the personal allowance, so making contributions before tax doesn't give you a tax saving.
If you were in a relief at source scheme instead, you'd pay £80 to get the same £100 pension contribution, with £20 added as tax relief.
That means someone in a net pay scheme could take home £20 less for every £100 contributed, simply because of how their employer's pension is set up.
The low earner's pension payment aims to make sure you don't lose out simply because your employer uses a net pay arrangement rather than relief at source.
HMRC will calculate a payment based on the pension tax relief you missed out on. The amount you receive will depend on your income, pension contributions and tax position during the year.
Unlike standard pension tax relief, this top-up is paid directly into your bank account – not into your pension pot.
Government estimates from 2021 suggested the average payment would be around £53, though the exact amount depends on how much you contributed during the tax year. HMRC now says it expects payments to be around £70.
The payment is not taxable and will not affect your benefit entitlement, for example Universal Credit.
Whether you’re unsure if you have enough to retire, or are already accessing your savings, our money guidance service can talk you through your options. Which? Money members get unlimited access to them via phone.
Find out moreYou are eligible for the top-up if you meet all of the following criteria:
You can check with your employer or pension provider which arrangement your workplace pension uses.
Your payslip may also help you to work out what scheme you are under. One clue is to compare your gross pay (total earnings) to your taxable pay. If your taxable pay is lower than your gross pay, this may mean your pension is deducted before tax under a net pay arrangement. If you're unsure, check with your employer or pension provider.
HMRC is set to assess eligibility on a year-by-year basis, meaning you may qualify in one tax year but not the next.
HMRC will contact eligible people directly to invite them to claim their payment, so you don't need to contact HMRC first.
Payouts covering contributions made during the 2024-25 tax year are expected to begin in the coming months. Moving forward, HMRC will assess eligibility at the end of each tax year and write to those who qualify.
To receive the money, you must actively accept the payment by providing your bank details online via your personal tax account.
HMRC will not issue cheques, nor will it store your bank details, meaning you must re-confirm your account information each year you are eligible.
Former pensions minister and now partner at pension consultants LCP, Steve Webb warned that people might mistake the unexpected offer of money for a scam, predicting an ‘incredibly painful’ rollout with a high risk of low take-up among unaware taxpayers.
He added: ‘Most people will not have a clue about this issue and may be suspicious of a letter out of the blue from HMRC offering them free money.’
In response to scam concerns, HMRC says it provides clear guidance on how to verify correspondence and urges taxpayers to check any/all unexpected letters against Gov.uk.
The tax office also advised recipients to respond strictly through official HMRC channels, emphasising that it will never ask for passwords, PINs or bank transfers to claim a payment.
