HM Revenue and Customs (HMRC) is preparing to launch a significant letter campaign aimed at informing low-income workers about unclaimed pension top-ups. Officials estimate that approximately one million individuals may have missed out on hundreds of pounds in government pension contributions annually due to an obscure quirk in the tax system.
This issue primarily affects lower earners who, under certain workplace pension schemes utilizing a 'net pay' tax mechanism, do not receive the full tax relief that their higher-earning colleagues benefit from. It is estimated that three in four of those affected are women. The total amount potentially missed by these workers is estimated to be in the hundreds of millions of pounds.
HMRC's campaign, which is intended to run until early 2027, will begin sending letters to eligible individuals. For contributions made from the 2024-25 tax year onwards, low-paid employees can claim a top-up if their workplace pension uses the 'net pay' system. Tax officials anticipate that payments for the current financial year will commence in the coming months as claims are processed. More automated systems are planned for subsequent years.
The actual amount of the top-up will vary depending on individual pension contributions, but a 2021 government consultation suggested amounts around £53. Previously, a fix for this loophole was anticipated by 2025, but has seen delays.
Steve Webb, a former pensions minister and pensions columnist, described the situation as 'unfair,' highlighting that workers have lost valuable pension tax relief due to the administration method of their workplace pensions. Employers can use one of two methods: 'net pay' or 'relief at source.'
Under the 'relief at source' system, employees contribute from their take-home pay, and pension providers claim basic rate income tax relief directly from HMRC, adding it to the pension pot. Conversely, the 'net pay' system allows employees to contribute before their tax bill is calculated, meaning tax relief is already factored in. While both systems are broadly equivalent for basic rate taxpayers, the 'net pay' mechanism creates a gap for lower earners.
Employees are automatically enrolled in pensions if they earn £10,000 or more, but the personal tax allowance is £12,570. This means some individuals earning between these figures but below the tax threshold can miss out on tax relief under the 'net pay' system. Crucially, employees have no choice over which system their employer's pension scheme uses.
There is a concern that many recipients may disregard the HMRC letters, mistaking them for scams, which could lead to a significant number of eligible individuals not claiming the money they are entitled to. "It is vital that communications are effective to make sure that people get the money to which they are entitled," Webb cautioned.