Low Earner's Pension Payment - the snail approaches its destination

SnowMan

Back in the 2021 budget the government announced it would tackle the low earners net pay scheme tax anomaly, now called the Low Earner's Pension Payment.

The anomaly was that low earners in a 'net pay' scheme (i.e a workplace pension scheme used by many employers where pension contributions are deducted from your salary by your employer before income tax is calculated on it) did not effectively get tax relief on their pension contributions. This was because low paid employees already paid no tax on employment income before the pension contributions were deducted and so deducting those contributions from pay didn't change the tax payable, as it was still zero, and so there was no effective tax relief.

Similar low earners in 'tax relief at source' schemes (used by personal pensions, SIPPs and some auto-enrolment workplace pensions) by contrast automatically get basic rate tax relief added to their pension.

As it said in the now archived pension schemes newsletter 134

The government will introduce legislation in a future finance bill to make top-up payments directly to these individuals, saving in a pension scheme using a net pay arrangement. These top-ups will be payable on pension contributions from the 2024 to 2025 tax year onwards and will be made in arrears. These payments will help better align outcomes with equivalent individuals saving into pension schemes using relief at source. No changes will be made to how individuals save into pension schemes using net pay arrangements, with no change to take-home pay or pension contributions.

5 years (and 50 newsletters) later government has got round to doing this for the roughly 1 million people affected see pension schemes newsletter 184 out today

The detail is in the newsletter to read but the main outcome is that payments for contributions made in 2024 to 2025 will begin in the coming months. HMRC will take a phased approach, gradually expanding the rollout over the remainder of the year and into early 2027.

As someone (along with many low paid colleagues) who didn't get tax relief on my contributions for a tax year prior to 2024/2025 while a member of one of The Pensions Trust (net pay) schemes this is long overdue. I had to be a member to get the matching employer contributions.

DRS1

Interesting. I had not heard of this until it got mentioned on another thread which has links to an LGPS note and a LITRG page on the subject courtesy of @blue_eyes

LGPS AVCs SIPPs — MoneySavingExpert Forum

SnowMan

Thanks @DRS1. The LITRG link, which I wasn't aware of, is below. It was last updated on 6th April 2026

https://www.litrg.org.uk/pensions/paying-pensions/tax-relief-pension-contributions/pension-tax-relief-problems-low-earners#2

The section 'how the low earner’s pension payment works' explains how the payment(s) are likely to be made.

'Low earner pension payment' is the term being used to describe it now. It is a payment to the affected individual equal to the tax relief and not itself a pension contribution. I've changed the title of the thread to call it that to help anyone searching for information once they get a letter from HMRC.

Of course the public sector defined benefit schemes are all net pay and so a good chunk of those getting these payments will be part time public sector employees. Interesting that there are estimated to be 1 million people who will be getting payments.

af1963

https://forums.moneysavingexpert.com/discussion/comment/82116666#Comment_82116666

Sure about that ?

The text says ..

they will be entitled to a low earner’s pension payment equal to the tax relief they would have received in their pension pot 

Nobody in a defined benefit scheme receives tax relief in their (non-existent) pension pot.

SnowMan

https://forums.moneysavingexpert.com/discussion/comment/82116899#Comment_82116899

Yes I'm sure about that. It's the tax relief they would have got if their contribution had been paid into a (hypothetical) relief at source defined contribution pension pot, except it hasn't been paid into the pension pot because of the anomaly and because it's not relief at source. Remember that defined benefit members (such as to the LGPS) earning well above the personal allowance will have a tax saving (relief) through contributing which they could have put into a DC pension whereas this cohort of low earners will have no tax saving. They say also in that link and this bit can't be clearer

If accepted, the payment is paid to you directly – it is not made to the pension scheme.

SnowMan

In terms of how much the Low Earner's Pension Payment payment is likely to be for low paid defined benefit and low paid defined contribution pension scheme members:

Defined benefit example

Fred earns £10,000pa evenly over the year and has no other taxable income . He has been a member of a Local Government Pension Scheme for many years. Because of his earnings level he pays employee pension contributions of 5.5% of his pay or £550 per year.

Fred's Low Earner's Pension Payment should be 0.055 x 10,000 x 0.2 = £110 (or 1.1% of his salary before the deduction of pension contributions).

So Fred is due about £110 per tax year from 2024/2025 as a Low Earner's Pension Payment and will receive it as a cash payment.

Defined contribution example

Sarah earns £11,000pa evenly over the year and has no other taxable income. For a number of years she has been contributing into the Smart Pension net pay pension arranged by her employer with minimum auto-enrolment contributions. She has been paying a pension contribution of 5% of earnings above £6,240pa. So she has been contributing £238pa (= (11000 - 6240) x 0.05).

Sarah's Low Earner's Pension Payment should be 20% of her employee contributions so £47.60 (= 0.2 x 238)

So Sarah is due about £47.60 per tax year from 2024/2025 as a Low Earner's Pension Payment and will receive it as a cash payment.

Qyburn

Why is this an issue for DB pensions? FFor DC the missing tax relief means less money in the DC pot and therefore ultimately less pension. I can't see how that applies for DB.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82118478#Comment_82118478

It is not about money in the pot for DB schemes it is about tax relief for the contribution.

If I earn £100k and pay employee contributions of £5k to a DB scheme via net pay then I get tax relief for that contribution - ie I am taxed on £95k not £100k. I pay less tax. If I earn £10k and contribute £500 to a DB scheme via net pay I would not have paid any tax on £10k anyway so there is no effective tax relief for that contribution.

Triumph13

https://forums.moneysavingexpert.com/discussion/comment/82118478#Comment_82118478

Better to think of it in terms of how much the joining the scheme costs the employee. Every £100 of contributions only costs the person paying tax £80, but costs the low earner the full £100 from their pay packet.