Around one million low-paid workers in the UK are set to receive letters from HM Revenue & Customs (HMRC) about pension tax relief they may have missed out on. The mass letter-writing campaign, beginning this month, aims to identify individuals—predominantly women—who could be entitled to a new low earner's pension payment.
Who is affected by the net pay anomaly?
The scheme is designed to correct an anomaly that 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’.”
Vahey added that the people affected had been waiting a long time for the problem to be addressed, noting 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.
How much could workers receive?
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.
Why the anomaly hits low earners
Many workplace schemes, however, 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.
Timeline and next steps
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. HMRC's letters are being dispatched from this month, with payments expected to follow in the coming months and the programme continuing into early 2027.
