1 million low earners set to get letters from HMRC inviting claims for ‘low earner’s pension payment’, but risk of ‘huge’ non-take-up

A bulletin issued by HMRC this morning (27th August) says that payments are expected to start flowing ‘in the next few months’ as claims are received.  The letters will be rolled out gradually with the programme continuing into early 2027. 

The issue relates to the two different ways in which pension tax relief is paid. 

For those who pay into a personal pension, or any other scheme which uses the ‘Relief At Source’ (RAS) method, people pay into their pension pot out of their take-home pay. HMRC then add basic rate tax relief directly into the pot – regardless of the tax status of the individual. So, for example, an £80 contribution out of take-home pay gets a £20 top-up from HMRC.

However, many occupational pension schemes deliver tax relief through the pay packet – a process known as the Net Pay Arrangement (NPA).  With this approach, pension contributions are taken out before tax is worked out, meaning that a taxpaying individual pays less tax. For example, someone who pays £100 into a pension through this route gets £100 in their pension pot, but if they are a basic rate taxpayer they save £20 in income tax (because their taxable income is reduced) and the contribution costs them £80.

Where people are in the basic rate tax band, the two approaches generally amount to the same thing.   But under automatic enrolment, people can be enrolled who are under the tax threshold, as the threshold for AE is just £10,000 per year.

In the case of these lower earners, people who are non-taxpayers still qualify for a top-up if the scheme uses the RAS method. But if the scheme uses the Net Pay Arrangement, the individual misses out on tax relief because they are not a taxpayer – because reducing their taxable income has no effect on their tax bill.

Since employees have no choice as to which method is used by their workplace pension scheme, successive governments have taken the view that this is unfair and needs to be addressed. So the plan is that, for contributions from 2024/25 onwards, people will be able to claim a top-up if their workplace pension uses the NPA method.

The process is that HMRC will initially write to people and encourage them to claim this payment in respect of 2024/25. Once they have registered, a more automated system will be put in place for later years where they were affected by the same issue. 

What is not yet clear is the likely take-up of this payment. The initial exercise is in respect of financial year 2024/25, but further rounds of payments will be made for succeeding years.