Pension net pay top-ups to begin by 2026-27

In October 2021, the government announced that low earners contributing to net pay schemes would be eligible to claim top-ups from 2024-25.

At the time, economic secretary to the Treasury John Glen said the initiative would “broadly equalise outcomes for all lower-earning pension savers”.

There are currently two ways for the government to provide pensions tax relief, but low earners with taxable incomes beneath the personal allowance can receive varying levels of take-home pay depending on the way their schemes are run.

Low earners using relief at source receive a 20 per cent top-up on their pension saving, even if they do not pay income tax. 

If they are in schemes using a net pay arrangement, however, they receive tax relief at their marginal rate. This can result in no relief if their income is below the personal allowance, reducing their take-home pay compared with those benefiting from relief at source.

In response to a call for evidence from the Work and Pensions committee, the Treasury has now confirmed that the first top-ups for those in net pay schemes will be based on contributions made in the 2024-25 period and be paid by 2026-27.

“The IT changes required to implement this are complex,” the Treasury's response read.

“Given other ongoing HMRC delivery programmes, the system changes will be in place by April 2025.

“Paying the top-up in arrears reduces burdens on individuals, employers, and pension schemes.”

Individuals’ tax positions are only known at the close of the tax year when all sources of income can be identified. Paying top-ups within the tax year would risk paying ineligible savers, the Treasury added.

It forecast that in 2025-26, up to 1.2mn individuals three-quarters of whom are women — may receive top-ups worth in total between £60mn and £70mn a year. It expects the average top-up to be around £50 a year.

Alex Janiaud is deputy editor of FTAdviser's sister publication Pensions Expert