There are two main methods of giving pensions tax relief:
- net pay arrangements - where pension contributions are taken out of employees’ gross pay before tax, thereby reducing their taxable pay; and
- Relief at Source (RAS) - where tax relief is given by paying an amount net of basic rate and the pension fund reclaims that basic rate tax from HMRC to add to their contributions.
Whilst these two methods provide the same outcomes for most, low earners with taxable incomes below the personal allowance can have different levels of take-home pay depending on how their pension scheme is administered. Those in schemes using RAS receive a 20% top-up on their pension saving even if they pay no Income Tax, whilst those in schemes using net pay arrangements receive tax relief at their marginal tax rate, i.e. 0%. The effect is that low earners in schemes using net pay have less take-home pay than they would if they were saving into a scheme that uses RAS.
Top-ups to low earners
Finance Act (No.2) 2023 introduced a measure to allow HMRC to pay a top-up to low earners making contributions to pension schemes using a net pay arrangement in 2024/25 onwards. In the following tax year, HMRC will notify those who are eligible and invite them to provide the necessary details for the top-up to be paid direct to their bank account.
Where:
- an individual is entitled to be given relief in accordance under s193 FA 2004 (net pay arrangements) in respect of the payment of a contribution under a pension scheme;
- the individual is entitled to the personal allowance (currently £12,570) for the tax year in which the payment is made (‘the relevant tax year’); and
- the amount of the individual’s total income for the relevant tax year does not exceed the personal allowance for the relevant tax year
then HMRC must make arrangements to secure that, so far as reasonably practicable, they pay to the individual the appropriate amount in relation to the contribution.
The appropriate amount is:
- where the individual’s total income for the relevant tax year plus the contribution does not exceed the personal allowance for the relevant tax year, an amount equal to Income Tax at the relevant rate on the whole of the contribution; and
- where the individual’s total income for the relevant tax year plus the contribution does exceed the personal allowance for the relevant tax year, an amount equal to Income Tax at the relevant rate on an amount calculated as C – E where:
- C equals the whole of the contribution; and
- E equals the amount by which the personal allowance is exceeded by the individual’s total income for the relevant tax year plus the contribution.
The arrangements must secure that the amount is paid as soon as reasonably practicable after the tax year in which the contribution is paid and must include a procedure for the purposes of allowing an individual to decline to receive that amount.
For the purposes of Income Tax, apart from determining whether this section applies for calculating the appropriate amount, an amount paid to an individual in accordance with the arrangements is to be treated as if it were earnings from an employment in the relevant tax year in respect of duties performed in the UK.
‘The relevant rate’ is the basic rate or Scottish or Welsh basic rate for that year.
Low earner’s pension payment - what employers need to know
So that was the theory!
From August 2026, HMRC will be contacting around one million eligible individuals directly about the ‘low earner’s pension payment’, previously referred to by HMRC as the ‘low earner’s anomaly’.
HMRC states that:
- employers do not need to take any action; and
- individuals do not need to contact HMRC to receive a payment.
However, HMRC does state that, as it will be contacting individuals about money they are owed, employers may receive questions about whether messages are genuine. HMRC states that employees can be reassured that:
- HMRC correspondence can be checked on GOV.UK by searching ‘check if an email from HMRC is genuine’. ‘Low earner’s pension payment’ can be found from August 2026; and
- HMRC will never ask for money transfers, PIN codes or passwords.
However, that hasn’t stopped scammers in the past!