Around one million low-paid workers are to receive letters from HMRC about pension tax relief they may have missed out on because of a long-standing flaw in the system.
The HMRC is beginning a mass letter-writing campaign to identify people – mainly women – who could be entitled to a new low earner’s pension payment. The scheme is designed to correct an anomaly which has left some of the UK’s lowest earners with less pension benefit than people earning more than them.
Rachel Vahey, head of public policy at AJ Bell, said: “It is a scandal that around one million of the UK’s lowest earners have missed out on valuable pension tax relief because of the so-called ‘net pay anomaly’.”
She said the people affected had been waiting a long time for the problem to be addressed, adding that around three-quarters of those affected are women.
Letters are being sent out from this month, with payments expected to start in the coming months and the programme continuing into early 2027.
The Government has previously estimated that around one million people could benefit, with an average payment of around £70 a year.
A 2021 Government consultation estimated the average at £53, although the amount each person receives will depend on their individual circumstances and pension contributions. The problem stems from the two different ways in which pension tax relief can be provided.
Under a relief-at-source arrangement, workers pay into their pension from their take-home pay and HMRC adds basic-rate tax relief to the pension pot.
So someone paying £80 into their pension would have another £20 added by HMRC, taking the total contribution to £100.
But many workplace schemes use a net pay arrangement, where pension contributions are deducted from salary before income tax is calculated.
For a taxpayer, the two systems generally produce the same result. The problem arises for low earners who pay no income tax.
Because there is no tax to reduce under a net pay arrangement, they historically received no equivalent tax relief. Yet someone earning the same amount and paying into a relief-at-source scheme could still receive the 20 per cent top-up.
An example supplied by pension experts illustrates the difference. A worker earning £10,000 a year who pays £80 into their pension could have £20 added under relief at source, meaning £100 goes into their pension.
Under a net pay scheme, only the £80 contribution would go into the pension. The Government first announced its intention to tackle the ‘lower earner’s anomaly’ in November 2021.
The new payment will apply to eligible contributions made from the 2024/25 tax year onwards and is intended to provide a top-up broadly equivalent to the tax relief that would have been available under a relief-at-source scheme.
People do not need to contact HMRC to establish whether they are eligible.
HMRC will identify people it believes may qualify and contact them directly. The letters will explain what they need to do to accept the payment.
People can also receive the communication through their personal tax account. Employers, payroll departments and pension administrators do not need to assess eligibility or make applications on behalf of workers.
But there are concerns that some people could fail to receive money they are entitled to. Pension expert and former pensions minister Steve Webb warned of a “real risk of huge non-take-up”.
He said many people may not understand why HMRC is contacting them and could even suspect that an unexpected letter offering a payment is a scam.
He said: “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. Some may suspect it is a scam.”
The payments will be made directly into recipients’ bank accounts rather than into their pensions. People can choose to put the money into their retirement savings if they wish. The payments will not affect entitlement to benefits or create National Insurance reporting requirements.
The first exercise covers the 2024/25 tax year. Once people have registered, a more automated system is expected to deal with later years in which they were affected by the same problem.
