A policy update by HMRC taking effect in 2025 could leave thousands of low-income workers unaware they are eligible for a government pension top-up. This new system addresses long-standing disparities in tax relief allocation for pension contributions among workers earning less than the personal allowance threshold, currently set at £12,570.
Background: The Pension Relief Gap
Under previous rules, those in “relief at source” (RAS) pension schemes automatically received a 20% government top-up on contributions, even if they didn’t earn enough to pay income tax. However, employees enrolled in “net pay arrangements” through their employers did not receive this benefit if they were non-taxpayers.
This discrepancy meant low earners in net pay schemes effectively received less government support for their retirement savings than those in RAS arrangements, despite earning the same income.
The New Relief System
Following a consultation process in 2022, HMRC launched a new system to resolve this issue. Starting in the 2025 tax year, eligible individuals will receive a direct payment from HMRC equivalent to the 20% tax relief they missed. This money will be paid straight into recipients’ bank accounts rather than added to their pension pots.
HMRC will begin mailing letters to eligible individuals requesting their bank details. No emails or texts will be sent as part of this process to prevent fraud and confusion.
Eligibility and How It Works
To qualify for the new pension top-up, an individual must:
- Earn less than £12,570 annually
- Be enrolled in a net pay pension scheme via their employer
| Criteria | Requirement |
|---|---|
| Annual Earnings | Below £12,570 |
| Pension Scheme Type | Net Pay Arrangement |
| Payment Type | Direct to individual’s bank account |
| Automatic? | No – Must respond to HMRC letter |
HMRC projects that if every eligible person claims, the scheme could cost up to £84 million annually. However, it has only budgeted £10 million for the 2025 tax year and £15 million for 2026, indicating an expectation that many will not claim.
Risk of Missing Out
Pension experts warn that a large number of people may overlook or disregard HMRC’s letters due to fear of scams. With no digital communication involved, the risk is high that letters may be mistaken for junk mail.
Hymans Robertson, a leading pension consultancy, estimates that around 75% of those eligible are women, given their prevalence in part-time and low-wage employment. This initiative could offer a small yet meaningful step toward addressing the gender pension gap.
Role of Employers in 2025
Employers are being urged to actively inform staff about this new policy. According to Hymans Robertson, companies have a critical role in bridging the communication gap, as they are often the most trusted source of financial information for employees.
Hannah English, Head of DC Corporate Consulting at the firm, noted: “Employers should see this as a cost-free opportunity to provide their workforce with financial support. Employees might discard HMRC’s letters without realizing their importance.”
Conclusion
The HMRC pension top-up scheme presents a valuable financial benefit for low-income earners in 2025, especially those in net pay arrangements. However, a lack of awareness and fear of fraud could result in many missing out. It is crucial for employers to step up communication efforts and for individuals to stay vigilant and informed. Every eligible person should check their mail carefully and follow up with HMRC to claim what they are owed.
FAQ
Who is eligible for the 2025 HMRC pension top-up?
To be eligible, you must earn less than £12,570 per year and be enrolled in a net pay pension scheme.
How much will I receive?
You will receive a payment equal to 20% of your pension contributions, matching the relief given under RAS schemes.
How will I get the payment?
The money will be deposited directly into your bank account after you respond to HMRC’s letter with your details.
Will the payment go into my pension pot?
No, the payment will be made directly to your personal bank account.
What if I don’t receive a letter from HMRC?
If you believe you’re eligible but haven’t been contacted, you should get in touch with HMRC for guidance.
Are emails or texts being sent?
No, HMRC will only contact individuals by post to prevent phishing and scams.
Can employers help with this?
Yes, employers are encouraged to inform eligible staff and help them understand the process.
What should I do if I receive a letter?
Check that the letter is genuine, then follow the instructions to provide your bank details securely.
Why are women more affected?
Around 75% of those eligible are women, due to their overrepresentation in part-time and lower-paid jobs.
Is there a deadline to claim?
While there is no official deadline yet, it is advised to respond promptly once contacted by HMRC.
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