Nearly one million low earners are eligible for a payment from HMRC to compensate for missed pension tax relief. The issue arises from administrative differences in how workplace pension schemes process tax relief, specifically affecting those whose pensions use a 'net pay arrangement' (NPA).
Under an NPA, contributions are deducted from gross pay before income tax is calculated. However, low earners with annual incomes below the personal allowance of £12,570 do not pay income tax, meaning they do not receive a tax saving or a separate top-up into their pension pot, unlike those in 'relief at source' schemes.
To address this, the government introduced a new policy in 2022, with the system applying to pension contributions made from the 2024-25 tax year. Payments for that first year were delayed until 2026.
HMRC will calculate the payment based on the missed pension tax relief, with government estimates from 2021 suggesting an average payment of around £53, though HMRC now expects payments to be around £70. This top-up will be paid directly into bank accounts and is not taxable, nor will it affect benefit entitlements.
Eligibility requires individuals to have paid into a workplace pension using an NPA, had a total annual income below £12,570, and made pension contributions during the 2024-25 tax year. HMRC will contact eligible individuals directly to invite them to claim their payment, which requires providing bank details online via a personal tax account.