HMRC is writing to around one million people who may have missed out on a Government top-up to their pension. The letters aim to encourage eligible individuals to claim missed tax relief on contributions made in 2024 and 2025.
How pension tax relief works
Pension tax relief is where the tax you would normally pay on your income is added to your pension pot instead. There are normally two different ways this is applied. If you pay into a pension from your take-home pay, so after income tax has been applied, your pension provider will claim the tax relief from HMRC and add it to your pot.
If you are a basic rate taxpayer, it means for every £80 you pay into your pension, the Government adds £20 in tax relief, giving you a total saving into your pension of £100. But if your pension contribution is deducted from your gross pay, so before income tax has been taken off, you effectively get the tax relief straight away as less of your income is subject to tax.
Who is affected
Under pension auto-enrolment rules, people can be enrolled into their workplace pension scheme despite being under the threshold to pay income tax. You can be auto-enrolled into a pension scheme if you earn more than £10,000 a year, while the threshold for when you start to pay income tax is £12,570 a year.
People who are non-taxpayers still qualify for pension tax relief. However, if the pension contribution is deducted from gross pay, the individual misses out on tax relief because they are not a taxpayer – because reducing their taxable income has no effect on their tax bill.
Payment estimates and warnings
A consultation in 2021 estimated that the average payment would be around £53, though the exact figure will depend on how much was paid into the pension by each individual. Once people have registered, a more automated system will be put in place for later years.
However, former pensions minister Sir Steve Webb has warned that there is a risk people may not realise the letters from HMRC are genuine. Sir Steve, partner at pension consultants LCP, said: “It is clearly unfair that around one million low earners have missed out on pension tax relief, simply because of the way in which their workplace pension is administered.
“But the process of getting these payments to the right people is going to be incredibly painful and there is a real risk of huge non take-up. Most people will not have a clue about this issue and may be suspicious of a letter out of the blue from HMRC offering them free money. Some may suspect it is a scam. It is vital that communications are effective to make sure that people get the money to which they are entitled.”
HMRC response
An HMRC spokesperson said: “Customers don’t need to apply or contact us – we’ll send them information about how to receive their payment via post or their online tax account. We know some people may be cautious about unexpected contact, which is why we provide clear information about what to expect and how to verify the contact is genuine.
“Customers can check a letter is genuine on GOV.UK and should only respond via official HMRC channels. We’ll never ask for passwords, PINs or money to be transferred to claim a payment.”
