HMRC has confirmed it will finally start paying lower earner’s pension payments due from the 2024/25 tax year ‘over the coming months’, until early next year. The payments address the ‘lower earner’s anomaly’, a long-standing issue where low earners paying into a pension scheme operating tax relief on a ‘net pay’ basis receive less tax relief than those paying into a ‘relief at source’ scheme.
The Labour Party government first announced its intention to address this anomaly in November 2021. It has previously estimated that around one million people could benefit, with an average annual payment of £70 a year. Eligible individuals do not need to apply, as HMRC will contact them directly.
Long-delayed payments finally confirmed
Rachel Vahey, head of public policy at AJ Bell, commented: “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’.
“While the government deserves credit for finally delivering a solution and putting it into legislation, the first payments to those affected have been a long time coming. Those affected won’t get to see their money until later this year or into next – a year after it was originally promised, and over a decade after the problem first came to light.
“Worse still, it is people on the lowest incomes – three quarters of whom are women – who have been hit hardest by this administrative failure.”
How payments will be made
For those affected, the money will be paid directly into their bank account rather than into their pension. They can, of course, choose to put it into their retirement savings if they wish, according to Vahey.
Charlene Young added: "Claiming pension tax relief may sound like a pain but it could net you thousands of pounds. To start with, the best thing to do is find a payslip. That should show your NI number and any contributions made to your pension.
How to check your pension scheme
Young advised: "Firstly, find out what type of scheme you’re in. Your employer or pension provider can tell you this, or you can check your payslip. In a ‘net pay’ scheme, you’ll pay your pension contribution before any tax is paid. Your payslip will show that your taxable pay drops by the exact amount of your pension contribution before tax is calculated. In this case, income tax won’t have been deducted prior to the money being paid into a pension, meaning you’re already getting the full rate of relief and don’t need to claim.
"But if your pension contributions are deducted after tax has been taken, this indicates a ‘relief at source’ scheme. The pension scheme will automatically claim back 20% basic rate relief, but you must then claim any additional relief yourself. If you’re struggling to figure things out, ask your employer or pension provider what kind of scheme you’re in.
"Once you’ve established you’re in a relief at source scheme, if you’re higher or additional rate taxpayer you should be able to claim the additional tax relief owed to you. To claim you’ll need to contact HMRC directly and there are a few different ways in which you can do this. If you complete a tax return, you can include the information there and recover any tax relief owed."
