Economy 4 min read By Callum Montgomery
HMRC pension top-ups expose a tax-relief gap affecting 1.32 million low earners
HMRC is beginning a correction to the ‘net pay’ pension anomaly, with around one million letters expected and average payments of roughly £70 for 2024/25. The policy highlights how pension tax relief can produce different outcomes for people on the same salary.
HMRC is beginning to correct a long-running anomaly in workplace pensions that left lower earners with less tax support than colleagues making the same contribution through a different type of pension scheme.
The new low earner’s pension payment applies to people whose workplace scheme uses a net pay arrangement and whose taxable income is below, or in some cases close to, the personal allowance. The government estimates that around 1.32 million people could be eligible, with women making up about 75% of those affected.
The mechanism is technical but the inequality is straightforward. In a relief-at-source pension, a provider can claim basic-rate tax relief and add it to a saver’s pension even if the person earns too little to pay income tax. Under a net pay arrangement, contributions are deducted before income tax is calculated. That works well for taxpayers, but someone below the tax threshold has no income tax to reduce and therefore receives no equivalent benefit.
The government’s answer is a direct top-up from HMRC. The system applies from the 2024/25 tax year onwards, with eligibility assessed separately each year. MoneySavingExpert reports that HMRC is preparing to contact around one million people and that the average payment for 2024/25 is expected to be about £70.
This is better understood as a pension-tax-relief correction than a conventional tax refund. The money compensates for relief that a low earner would effectively have received under a different pension mechanism. It will be paid directly to the individual rather than automatically placed into the pension account.
That design has policy advantages and drawbacks. Direct payments make the correction visible and allow HMRC to deal with each person without changing the employer’s pension arrangement. But it also means recipients must engage with HMRC and provide payment details rather than simply seeing their pension pot adjusted in the background.
The distributional effect matters. The government’s estimate that three quarters of those affected are women reflects the concentration of women in lower-paid and part-time work. A small annual difference in tax relief may not look dramatic, but pension policy compounds over decades. Repeated disadvantages in contributions can reinforce existing gaps in retirement saving.
Employers should also understand the issue even though the payment is administered by HMRC. Staff may ask why one pension arrangement creates a top-up while another does not. The difference is not a sign that an employer has necessarily operated the scheme incorrectly; it comes from the interaction between the personal allowance and the two accepted methods of pension tax relief.
There is also a fraud risk. HMRC-related payments are attractive material for scammers. MoneySavingExpert says legitimate recipients should expect a letter and, where applicable, a message in their Personal Tax Account. Bank details should be supplied only through the official account or the verified telephone route. The report says HMRC will not initiate the low-earner payment process through unsolicited text messages or emails.
For the Treasury, the bigger significance is that a highly technical part of pension administration has been producing a systematic social effect. The correction does not redesign workplace pensions, but it does attempt to equalise the outcome for low earners from 2024/25 onwards.
The success of the policy will now depend on contact and take-up. Identifying eligible people is only the first step; HMRC must ensure they recognise a genuine letter, complete the process safely and actually receive the money intended to close the gap.
