More than a million of the lowest-paid workers in the UK will receive a financial boost from 2025.
New Government legislation just published confirms that around 1.2 million low earners who save for their pension through a Net Pay Arrangement (NPA) will get the same level of government top-up as those who use Relief at Source schemes.
For NPAs, pension contributions are deducted before income tax is calculated, whereas with Relief at Source it is after.
Take home pay boosted
Around 200,000 workers will receive a £100 increase in their take-home pay. The average beneficiary will receive an extra £53 a year, with 75% of affected workers being women.
The number of people eligible for a top-up of £100 or more is based on the total number of people in the UK who contribute at least £500 every year into their NPA pension but have no tax relief on that contribution.
Financial Secretary to the Treasury Lucy Frazer said: “A quirk in our pensions tax system has meant that over a million low-earners have lost out on government top-ups to their pensions, resulting in comparatively less take home pay.
“We are correcting this injustice so low earners will get the same level of Government support, no matter what type of pension they use.
Since 2015, people saving through an NPA have had less take home pay compared to similar-earning savers who use a Relief at Source scheme. Those using the latter type of pension scheme receive a 20% top-up from the Government on their savings, while those using NPAs receive tax relief at their marginal rate – 0%.
Professional advice
The Government has published legislation confirming that it has rectified this anomaly, and low-earning pension savers will receive similar top-ups regardless of what pension scheme they are using. Beneficiaries will receive their top-ups directly into their bank accounts from 2025 and HMRC will be notifying those who are eligible then.
There are several different types of pension contributions. If you would like pension advice, we would recommend seeking professional guidance.