Around 1 million people are receiving a letter this month from HM Revenue and Customs, with the key income for those affected being around £12,570. The correspondence concerns the new Low Earner’s Pension Payment, designed to correct a longstanding difference that meant 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 and how it works
People potentially affected typically earned around the £12,570 Personal Allowance and made pension contributions through a scheme operating a net pay arrangement. 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.
Thomas Drury, money-saving expert at The Investors Centre, is warning workers not to dismiss the correspondence as irrelevant, particularly if they earn too little to normally pay Income Tax.
“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 said.
Why the payments are being made
Government guidance explains that workers in relief-at-source schemes can receive a 20% pension top-up even if they do not pay Income Tax, while low earners in net pay arrangements historically received relief at their marginal tax rate, which could effectively be 0%. The new payments are intended to correct that difference.
The Government previously estimated that around 1.2 million people could be affected by the underlying issue, with women expected to make up around 75% of those earning below the Personal Allowance while contributing through net pay arrangements.
“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,” Drury added.
What workers need to do
One of the most important parts of the scheme is that workers do not need to make an initial application or work out for themselves whether they qualify. HMRC says it will identify eligible individuals using information it already holds and contact them either by post or through their Personal Tax Account. Workers should then follow the instructions provided to accept their payment.
“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,” Drury said.
“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. 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. It is also worth checking your Personal Tax Account rather than relying entirely on the post, particularly if you have moved house since the 2024/25 tax year.”
