HM Revenue and Customs (HMRC) is preparing to launch a large-scale letter campaign to encourage low-income workers to claim pension top-ups they may have missed. This initiative aims to address an issue where a portion of the workforce has been inadvertently denied hundreds of pounds in government pension contributions annually due to an obscure tax system mechanism.
An estimated one million low earners, three-quarters of whom are women, are believed to have been affected by this loophole. The problem stems from two methods employers use to administer workplace pension tax relief: 'net pay' and 'relief at source.' While both systems can provide tax relief, the 'net pay' arrangement, often used by master trusts managing funds for multiple employers, can disadvantage lower earners. Under this system, contributions are made before tax is calculated, meaning tax relief is implicitly included. However, for individuals earning between £10,000 and the £12,570 personal allowance, this can result in them missing out on the expected government top-up, as their contributions are not adjusted for tax relief.
HMRC expects payments for the 2024-25 tax year to begin in the coming months following claims. For subsequent years where the issue persists, a more automated system is planned. The exact amount of the top-up will vary based on individual contributions, with earlier estimates suggesting amounts around £53 per year.
This effort follows years of delays, with previous plans to rectify the loophole by 2025. The current campaign is scheduled to run until early 2027. Experts caution that a significant risk exists of individuals ignoring the HMRC letters, potentially mistaking them for scams. Steve Webb, a former pensions minister and pensions columnist, highlighted the critical need for effective communication to ensure recipients claim the funds to which they are entitled.
For contributions made from the 2024-25 tax year onwards, affected employees will be able to claim a top-up if their workplace pension scheme utilizes the 'net pay' mechanism. The process of distributing these funds is anticipated to be complex, with a substantial risk of low uptake due to public unfamiliarity with the issue and potential suspicion towards unsolicited financial offers from the government.