HM Revenue & Customs (HMRC) is writing to approximately one million lower earners who missed out on tax relief on their pension contributions, informing them that they are due a top-up averaging £70 each. The letters are part of a government initiative to rectify the disparity caused by different pension scheme administration methods.
Why some workers missed out on tax relief
The issue stems from the type of workplace pension scheme an employee is enrolled in. Employers choose between two main types: 'relief at source' (RAS) or 'net pay' arrangements. In a RAS scheme, pension contributions are taken after tax is calculated, meaning basic rate tax relief is automatically added. In contrast, a net pay scheme deducts contributions before tax is calculated, which benefits taxpayers by reducing their taxable income.
For basic rate taxpayers, both approaches generally result in the same outcome. However, under automatic enrolment, individuals can be enrolled even if their earnings fall below the tax threshold. For these lower earners, the distinction becomes significant. In RAS schemes, non-taxpayers still receive a top-up. But in net pay arrangements, because the individual pays no tax, reducing taxable income has no effect on their tax bill, so they miss out on the relief entirely.
Concerns over low take-up and scam fears
Steve Webb, a partner at LCP, has raised concerns about the effectiveness of the communication effort. He warned that there could be "huge non-take-up" because many recipients may not understand the issue or might mistake the letters for scams. He stated: "It is clearly unfair that around 1 million low earners have missed out on pension tax relief, simply because of the way in which their workplace pension is administered."
Webb 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. Some may suspect it is a scam." He emphasised the importance of clear communication, saying: "It is vital that communications are effective to make sure that people get the money to which they are entitled."
Payment rollout schedule
HMRC has confirmed that payments for contributions made during the 2024/25 tax year will begin in the coming months. The rollout will be phased, gradually expanding over the remainder of the year and into early 2027. Eligible individuals will be contacted directly by post, and no action is required from them at this stage.
The move follows a similar DWP announcement about letters being sent in October entitling claimants to a bonus. HMRC's initiative aims to address the historical imbalance affecting lower earners in net pay schemes, ensuring they receive the pension tax relief they are due.
