Around one million workers who missed out on some or all the tax relief due on their workplace pension contributions may be contacted by HMRC about payments averaging approximately £70, according to LCP, but the fear is many of these people will think it’s a scam.
The payment is intended to compensate people who paid into workplace pensions operating under Net Pay Arrangements who received less tax relief than comparable workers in relief at source schemes. The payments should begin gradually over the coming months. Around three quarters of those expected to benefit are women.
HMRC will contact eligible people in stages, either by post or through their Personal Tax Account, with the process continuing into early 2027.
Why are people receiving these payments?
People who pay into a personal pension, or any scheme using the ‘relief at source’ method, pay into their pension from the money that they take home. HMRC will then add tax relief at the basic rate of 20%, which would mean an £80 contribution would be topped up by £20 from HMRC, to make a total contribution of £100.
However, some occupational schemes use the Net Pay Arrangement (NPA), which means the pension contribution is deducted before income tax is calculated. So, tax relief is provided through a reduction in the person’s income tax bill, rather than being added to the pension by HMRC.
Someone who pays £100 into a pension through this route gets £100 in their pension pot, but if they are a basic-rate taxpayer, they save £20 in income tax because their taxable income is reduced, and the contribution costs them £80, according to Sir Steve Webb, partner at LCP and former pensions minister.
As you usually don’t have a choice about how your employer deals with your pension contributions, successive governments have taken the view that this is unfair and needs to be addressed. So, the aim is that for contributions from 2024/25 onwards, eligible people who missed out on some or all the tax relief will be able to receive a top-up if their workplace pension uses the NPA method, according to LCP.
Once those affected are registered, a more automated system is expected to be used for later years if they’re still eligible for these rebates. Sir Steve added: “What is not yet clear is the likely take-up of this payment. The initial exercise is in respect of financial year 2024/25 but further rounds of payments will be made for succeeding years.”
Let us help you
If you, or someone you know, gets a letter about this pension top-up, then please get in touch with us and we will do what we can to help you.