New system applies to pension contributions from 2024-25 tax year

The government legislated in 2022 for a new system applying to pension contributions made from the 2024-25 tax year, designed to give low earners in net pay arrangement workplace pensions a payment making up for tax relief they missed out on¹. Payments for that first year were subsequently delayed until 2026¹. HMRC is writing to affected savers inviting them to claim what has been termed a "low earners pension payment"¹.

The issue arises from how workplace pension schemes process tax relief. Under relief at source, contributions are taken from net pay and HMRC adds a 20% basic-rate top-up directly into the pension pot, regardless of earnings or whether income tax is paid; an £80 contribution receives an automatic £20 top-up¹. Under a net pay arrangement, contributions are deducted from gross pay before income tax is calculated¹. Automatic enrolment starts at £10,000 a year, while workers earning between £10,000 and £12,570 do not pay income tax, so reducing taxable income through a net pay arrangement gives no tax saving and no separate top-up¹. Around three-quarters of those affected are believed to be women¹.

New rules apply to contributions from 2024/25 onwards, which it says will help put low-income net pay contributors in a similar position to those paying in via relief at source².

Eligibility requires all of: paying into a workplace pension using a net pay arrangement; total annual income below the personal tax allowance of £12,570; and pension contributions made during the 2024-25 tax year¹. Where total taxable income was less than the personal allowance, the payment is calculated as 20% of the gross pension contribution for the year; where income is above the allowance before deducting the contribution but below it afterwards, a partial top-up applies². Government estimates from 2021 suggested the average payment would be around £53, though HMRC now says it expects payments to be around £70¹. The payment is not taxable and will not affect benefit entitlement, for example Universal Credit¹.

Why it matters for households

People who paid into a net pay workplace pension while earning below £12,570 in 2024-25 are affected. HMRC will identify them after the end of the tax year and write to them; no application is needed, but the payment must be actively accepted by providing bank details, which HMRC says can be done online via a personal tax account¹. HMRC will not issue cheques and will not retain bank details, so bank information must be re-confirmed each year a person is eligible¹. HMRC assesses eligibility year by year, so someone may qualify in one tax year and not the next¹. The payment goes to the individual's bank account rather than into the pension pot, unlike standard pension tax relief¹.

What happens next

HMRC is unlikely to make contact until summer 2026 about payments for the 2024/25 year, which is later than originally planned, with payment notifications for 2025/26 to follow at a later date². Payouts covering 2024-25 contributions are expected to begin in the coming months¹. Former pensions minister Steve Webb, now a partner at pension consultants LCP, warned people might mistake the unexpected offer of money for a scam, predicting an "incredibly painful" rollout with a high risk of low take-up¹. HMRC says it provides clear guidance on verifying correspondence and will never ask for passwords, PINs or bank transfers to claim a payment¹.