A pension rule that most workers never choose and may never even notice has produced a measurable inequality for more than a million lower earners. HMRC’s new low earner’s pension payment is an attempt to correct it from the 2024/25 tax year onward.
The government estimates that about 1.32 million people are eligible for the top-up, with women accounting for roughly 75% of the affected population. MoneySavingExpert reports that HMRC is preparing around one million letters and that the average payment for 2024/25 will be approximately £70.
The policy problem begins with two legitimate methods of delivering pension tax relief. Under relief at source, a pension provider claims basic-rate relief from HMRC and adds it to the saver’s contribution. That can benefit someone even when their income is below the personal allowance.
Under a net pay arrangement, the employer deducts the pension contribution before calculating income tax. For someone who pays income tax, that automatically delivers relief. For a worker earning below the tax threshold, however, there is no tax liability to reduce. Two people making similar pension contributions can therefore receive different effective government support because their employers use different pension mechanisms.
That is a classic example of administrative design becoming distributional policy. The rules were not created to disadvantage women, but women are overrepresented in lower-paid and part-time work, so they make up most of the group that loses relief through the anomaly.
The new payment aims to equalise outcomes without forcing pension schemes to switch systems. HMRC identifies people affected by net-pay arrangements, calculates the missing relief and offers a direct payment. Eligibility is assessed separately for each tax year, beginning with 2024/25.
This route avoids a major redesign of workplace pensions, but it creates a new administrative chain. People have to receive the notification, trust that it is genuine, provide bank details through an official channel and accept the payment. Every extra step creates the possibility of non-take-up.
It also creates a security problem. Fraudsters routinely imitate HMRC. MoneySavingExpert says the tax authority will contact eligible people by letter and may place a message in their Personal Tax Account, but will not initiate the process through unsolicited text messages or emails. Bank details should be supplied only through the official account or verified telephone route.
The direct cash payment raises another policy question. Because the money is not automatically paid into the pension scheme, some recipients may spend it rather than save it. That gives individuals flexibility but means the correction may not fully reproduce the long-term investment effect that pension tax relief would have had inside a retirement pot.
At an average of about £70, the first-year amounts are small in national fiscal terms. Their significance lies elsewhere. Pension systems operate over decades, and persistent differences that look minor in one year can widen retirement gaps when combined with lower wages, career breaks and reduced contributions.
The programme is therefore a useful case study in how governments should assess tax policy. Formal neutrality is not enough if administrative structures consistently produce different outcomes for identifiable groups.
HMRC’s next challenge is operational: reach the eligible population safely and achieve high take-up. The broader challenge for policymakers is to spot similar anomalies before a technical rule has to be repaired years later with millions of individual payments.