HM Revenue and Customs (HMRC) has confirmed it will begin contacting approximately one million low-paid workers who could be eligible for a top-up “low-earner’s pension payment”.
The tax authority is preparing to reach out to individuals who have been unfairly denied pension tax relief because their workplace scheme operates under the Net Pay Arrangement method.
A bulletin published by the tax authority earlier this week revealed that payments relating to the 2024/25 tax year should begin arriving “in the next few months” once claims are processed.
The initiative aims to correct a long-standing anomaly in the pension system that has left non-taxpaying employees worse off than counterparts in schemes using a different administrative approach.
HMRC sending letters to 1 million pensioners ‘offering them free money’ – are you eligible?
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GETTYHowever, pension experts have already raised serious concerns that large numbers of eligible recipients could fail to respond to the letters, with many likely to assume the unexpected correspondence from HMRC is fraudulent.
Under the Relief At Source model, used by personal pensions and some workplace schemes, contributions come from post-tax income and HMRC tops up the pot with basic rate relief.
This means that those entitled will be able to claim an £80 payment receives an additional £20 regardless of whether the saver actually pays tax.
The Net Pay Arrangement works differently: contributions are deducted before tax is calculated, reducing taxable income and thereby lowering the tax bill for those who earn enough to pay it.
For basic rate taxpayers, both routes produce an equivalent outcome. The problem arises because automatic enrolment sweeps in workers earning as little as £10,000 annually — well below the income tax threshold.
HMRC is reaching out to pensioners
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Those individuals gain nothing from having their taxable income reduced, since they owe no tax in the first place, and their employer’s choice of scheme method is entirely beyond their control.
HMRC’s letters will be dispatched in stages, with the programme expected to run through to early 2027. Recipients will be invited to submit a claim for the top-up relating to their 2024/25 contributions.
Once individuals have registered through this initial round, a more streamlined and automated process is set to be introduced for future tax years in which the same issue applies.
The first wave of correspondence covers only the 2024/25 financial year, but additional rounds of payments will follow for subsequent periods.
Successive Governments have acknowledged the fundamental unfairness of the situation, given that employees have no say over which tax relief method their workplace pension adopts, and have committed to resolving it through this new claims-based system.
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Steve Webb, a partner at pensions consultancy LCP, warned that persuading eligible workers to actually claim could prove extremely difficult.
The former pensions minister said: “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.”
Sir Streve , who served under the Conservative-Liberal Democrat coalition Government, highlighted that the vast majority of those contacted will have no awareness of the underlying issue.
“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,” he added.