Updated on 6 April 2026

Pension tax relief: problems for low earners

Due to the way tax relief is given for employees paying into net pay arrangement pension schemes, some low earners currently do not receive the same tax relief as those who pay into a relief at source pension scheme. Here we look at the problem and also tell you about the ‘low earner’s pension payment’, which has been introduced as a remedy.

paperwork with the words 'TAX RELIEFS' showing
ShaunWilkinson / Shutterstock.com

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Introduction

If you are a low earner (that is, if you earn below or only just above the personal allowance – £12,570 in tax year 202/27) and are paying into a pension scheme via your employer, you may wish to check which type of pension scheme you are in. We explain the different types of scheme and the relief that is given in each, on our page How tax relief is given on pension contributions. Low earners who contribute under a net pay arrangement have historically (up until 2023/24) been at a disadvantage.

The problem – tax years up to and including 2023/24

If you are in a relief at source arrangement, the pension provider claims 20p tax relief back from HMRC for every 80p of your contribution received – no matter what the level of your earnings. This is subject to the basic rules in relation to who can get tax relief, which we explain on our page Tax relief on pension contributions.

If you are in a net pay arrangement, in years up to 2023/24 you could not get any tax relief if your income (before deducting the pension contributions) was below the personal allowance of £12,570. If your income was just over the personal allowance, but your pension contributions bring you below the personal allowance, you would only get partial relief.

Example – no tax relief on net pay pension contributions for a low earner in 2023/24

Jo earned £950 per month in 2023/24. Jo put £25 of her pay into her pension scheme every month. The pension scheme operated under net pay arrangements, so her employer deducted the pension contribution before calculating tax. This meant Jo’s earnings were taken to be £925 for tax purposes instead of £950. However, as Jo’s earnings fell below the usual monthly threshold for paying income tax (£1,048 for 2023/24), this reduction in taxable income made no difference and she got no tax relief on the contributions paid. This is because she would not have paid tax in any case, even if she made no pension contribution.  

If Jo had been in a relief at source scheme, her taxable employment income would be £950 a month. She would still not pay any tax, but in order to put £25 into her pension each month, she would only have to pay 80% of £25 (that is, £20) of her earnings into her pension pot. The remaining £5 would be paid into the pension pot for her by the government. This is because the pension scheme would claim the basic rate tax relief at 20% for Jo from the government. Jo would therefore have been £5 a month, or £60 a year, better off under a relief at source scheme, because it only costs her £20 to make a £25 pension contribution each month.

Example –partial tax relief on net pay pension contributions for a low earner in 2023/24

Joshi earned £1,100 per month in 2023/24. Josh put £100 of his pay into his pension scheme every month. The pension scheme operated under net pay arrangements, so his employer deducted the pension contribution before calculating tax. This meant Joshi’s earnings were taken to be £1,000 for tax purposes instead of £1,100. Because Joshi’s earnings were less than the monthly tax threshold of £1,048 he paid no tax. 

If Joshi made no pension contribution, his taxable earnings would be £1,100 per month, which is more the monthly tax threshold of £1,048.  He would have paid tax on income of £52 (that is, £1,100 less £1,048) each month, which would be £10.40 (£52 x 20%). 

By making the £100 monthly pension contribution, Joshi’s earnings were reduced less than the monthly tax threshold of £1,048 so he paid no tax. Joshi received tax relief of £10.40, meaning that it cost him only £89.60 to make a £100 pension contribution each month. 

In contrast, if Joshi earned, say, £1,300 each month and made a monthly pension contribution of £100, his taxable earnings would be £1,200 per month. Therefore, he would have received tax relief on his full pension contribution (which would be £20, calculated as 20% of £100). Because of the tax relief it would only cost him £80 to make a £100 pension contribution each month.

Changes from the 2024/25 tax year – Low earner’s pension payment

Following campaigning from LITRG and other organisations, the government agreed to tackle the unfairness faced by low earners in net pay arrangement pension schemes.  

New rules apply to pension contributions made from the 2024/25 tax year onwards, which will help to put low-income net pay contributors in a similar position to those paying in via relief at source. This will be done by offering affected people a top-up payment, called a ‘low earner’s pension payment’. 

  Though the rules apply to pension savers in respect of contributions from the 2024/25 tax year onwards – the final details of how the rules will apply are still being finalised. People entitled to a low earner’s pension payment for 2024/25 are likely to be contacted by HMRC in summer 2026. Payment notifications related to the 2025/26 tax year will follow at a later date. 

How the low earner’s pension payment works

The way the low earner’s pension payment works is broadly as follows: 

  • After the end of each tax year, HMRC will identify people who paid into net pay arrangements but did not receive tax relief on their full contribution because of the deduction of the personal allowance.  
  • HMRC will write to these people to let them know that they will be entitled to a low earner’s pension payment equal to the tax relief they would have received in their pension pot if they had been under a relief at source scheme. As mentioned above, HMRC is unlikely to make contact until summer 2026 about payments for the 2024/25 year, which is later than originally planned.  
  • If your total taxable income was less than the personal allowance, the payment will be calculated as 20% of the gross pension contribution for the year.   
  • There will be a restriction to the top-up payment if you are already getting some tax relief on your contribution. This means that if your income is above the personal allowance before deducting the pension contribution, but is below the personal allowance after the contribution is deducted, you will get a partial top-up payment. This will ensure you do not receive excessive relief via the top-up payment. 
  • HMRC say the payment will be automatically calculated and communicated to you, along with instructions for ‘accepting’ the payment. You should not need to apply for the payment – but you will need to take action to accept it. 
  • If accepted, the payment is paid to you directly – it is not made to the pension scheme.  
  • When accepting the payment, you will be asked to supply your bank account details to HMRC so that the top-up payment can be made. We understand you can provide these bank details via your personal tax account, or by telephoning HMRC. We understand that HMRC will not issue payments by cheque. 
  • HMRC will run these calculations for each tax year and will send annual letters to those who they believe are entitled to a low earner’s pension payment. Each year, you will be required to accept the payment and provide bank details – HMRC will not retain your bank account data or seek to make payments automatically. 
  • We understand that people entitled to a payment will have four years from the end of the tax year in question to accept the payment. 
  • The payment is not taxable and will not affect your benefit entitlement – for example universal credit.  

Example – top-up payment to net pay pension contributor from 2024/25

Will was paid £950 a month in 2024/25 and the personal allowance was £12,570. He paid £25 a month into his employer’s net pay pension scheme. He had no other taxable income.

Will’s annual employment income was £11,400 (being £950 x 12 months). His total net pay pension contributions were £300 (being £25 x 12 months). Will’s taxable income both before and after deduction of the pension contributions was below the personal allowance for the year, so he will be entitled to a full top-up payment from HMRC.

HMRC should write to Will in 2026 to let him know he is eligible for a low earner’s pension payment of £60 (being £300 x 20%). Will must then take action to accept the payment and provide his bank details to HMRC so they can issue it.

If Will was also in a similar position for the 2025/26 tax year, he should receive a further letter about any low earner’s pension payment for that tax year at a later date. Again, Will will need to accept the payment and provide his bank details to receive it.

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