HMRC is writing to approximately one million households across the country from August, informing workers that they may be owed money due to a historical issue with how their workplace pension was taxed.
The letters relate to the Low Earner's Pension Payment, a scheme designed to correct a long-standing disparity where some workers on lower incomes missed out on pension tax relief because of the type of workplace pension scheme their employer used.
Who is affected by the Low Earner's Pension Payment
People potentially affected typically earned around the £12,570 personal allowance and made pension contributions through a scheme operating a net pay arrangement. Under this system, contributions are taken from earnings before income tax is calculated.
HMRC will assess eligibility separately for every tax year from 2024/25 onwards, meaning some workers may eventually qualify for payments relating to more than one year.
Why the pension tax relief issue exists
Thomas Drury, money expert at The Investors Centre, explained: "The confusing part is that many of the people affected may reasonably think pension tax relief has nothing to do with them because they don't earn enough to pay income tax. But that is exactly why this issue exists."
Drury elaborated on the difference between pension schemes: "There are different ways workplace pension schemes administer tax relief. Under relief at source, a pension provider can add basic-rate tax relief to someone's pension even where that worker doesn't actually earn enough to pay income tax. Under a net pay arrangement, contributions are taken from earnings before Income tax is calculated."
He added: "That works well for someone who actually pays tax because their taxable pay is reduced. But if your income is already below the Personal Allowance, reducing your taxable income may give you little or no tax benefit."
How the payment aims to create fairness
Drury highlighted the unfairness the payment seeks to address: "Two people could have earned a similar salary and contributed towards a workplace pension, but one could have received a better tax outcome simply because their employers used different pension arrangements. The new payment is intended to make those outcomes fairer."
He stressed that workers do not need to take proactive steps to apply: "You don't need to ring HMRC and ask to be added to a list, and you don't need to pay a company to find out whether you're eligible."
What workers should do next
Drury advised those who think they may be affected: "If you think this might apply to you because you earned around £12,570 and contributed to a workplace pension, the sensible step is to make sure HMRC has your correct contact information and then watch for official correspondence."
He warned against ignoring the letters: "Don't throw the letter away because you assume anything from HMRC must be asking you for tax. In this instance, HMRC could actually be contacting you because it owes you money."
