HM Revenue and Customs is launching a major letter campaign urging around one million low-paid workers in the UK to claim pension top-up payments.
The initiative targets employees who missed out on hundreds of pounds of government pension tax relief due to an obscure tax system loophole, with women estimated to make up three in four of those affected.
Letters will begin to be sent now under the official low earner's pension payment campaign, which will roll until early 2027. Officials at HM Revenue and Customs (HMRC), the non-ministerial government department responsible for collecting UK taxes, expect payments for the 2024-25 financial year to average around £70 per person, with claims expected to start being paid in the coming months as applications rush in.
Tax loophole penalises low earners
The problem stems from how workplace pension schemes administer tax relief for individuals earning between £10,000 and £12,570. Under UK auto-enrolment rules introduced to boost retirement savings, employees earning £10,000 or more are automatically enrolled into a workplace pension scheme, but the personal allowance threshold at which workers start paying income tax is £12,570.
Employers and pension providers have two choices when handling tax relief: net pay or relief at source. Under relief at source, worker contributions are taken from take-home pay, and the pension provider claims basic rate tax relief directly from HMRC to add to the employee's pension pot.
By contrast, net pay schemes deduct pension contributions directly from pay before income tax is calculated. Most master trusts, which manage centralised pension funds for multiple employers, use the net pay mechanism. While net pay is convenient for top-paid staff, lower earners who pay no income tax receive zero tax relief under net pay, leaving them without government pension assistance while better-off colleagues receive the full benefit.
Warning over potential scam fears
Steve Webb, a partner at financial consultancy LCP and former UK Pensions Minister between 2010 and 2015, described the loophole as unfair. He warned that many eligible workers might ignore official correspondence due to fraud concerns.
"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," Webb said. He noted that most people will not have a clue about the issue and may suspect a letter out of the blue from HMRC offering free money is a scam.
Webb stressed that effective communications are vital to ensure workers receive the money to which they are entitled. The campaign follows years of delays after government officials previously committed to introducing a fix for the net pay loophole by 2025.
How to verify genuine HMRC letters
An HMRC spokesman confirmed that customers do not need to apply or contact tax authorities proactively. Officials will send information about how to receive their payment via post or through their online tax accounts.
"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," the spokesman said. Customers can verify that a letter is genuine on GOV.UK and should only respond via official HMRC channels.
The spokesman added that HMRC will never ask for passwords, PINs or money to be transferred to claim a payment. Following initial claims for the 2024-25 tax year, HMRC plans to put a more automatic system in place for later years. Top-ups were previously estimated at £53 in a 2021 government consultation, but actual amounts will depend on individual pension contribution levels.
