From August 2026, HMRC will begin contacting around one million individuals who may be entitled to a new Low Earner’s Pension Payment. As a result, employers and payroll teams should be prepared for questions from employees who receive correspondence from HMRC regarding the scheme.
The payment has been introduced to address a long-standing difference in how pension tax relief is received by employees depending on the type of workplace pension scheme they belong to. While employees may contribute the same amount towards their pension, historically some lower earners have missed out on tax relief that others receive simply because of the method used to administer pension contributions.
Why has the payment been introduced?
Many workplace pension schemes operate using a net pay arrangement. Under this method, pension contributions are deducted from an employee’s salary before PAYE tax is calculated. For employees who pay income tax, this provides immediate pension tax relief through payroll.
However, employees earning at or below the Personal Allowance may not pay income tax at all. As a result, there is no tax liability against which pension tax relief can be applied. Although they still make pension contributions, they do not benefit from the tax relief that higher earners receive.
In contrast, pension schemes operating under the relief at source method deduct contributions after tax. The pension provider then claims basic rate tax relief directly from HMRC and adds it to the employee’s pension pot. This means even individuals who do not pay income tax can still receive a government pension contribution.
The introduction of the Low Earner’s Pension Payment is intended to create a fairer outcome for lower earners who have contributed to a pension through a net pay arrangement.
What does this mean for employers?
The most important message for employers is that no action is required.
HMRC will identify eligible individuals and contact them directly, either by post or through their Personal Tax Account. Employers do not need to assess eligibility, make claims on behalf of employees, amend payroll records or contact HMRC.
Employees also do not need to submit a claim before being contacted by HMRC. Eligibility will be reviewed by HMRC for each tax year, beginning with the 2024/25 tax year.
Those most likely to qualify are employees who earned close to the Personal Allowance threshold, currently £12,570, and made pension contributions through a net pay arrangement.
An example in practice
Consider an employee earning £12,000 per year who contributes £100 to a workplace pension under a net pay arrangement. Their pension contribution is deducted before PAYE is calculated. As they have no income tax liability, they receive no tax relief on that contribution and their take-home pay is reduced by the full £100.
By comparison, an employee earning the same amount but contributing through a relief at source pension scheme would typically pay £80 from their take-home pay. The pension provider would then claim £20 in tax relief from HMRC, meaning £100 is added to the pension fund.
The Low Earner’s Pension Payment is designed to help address this difference.
What will happen from August 2026?
Payroll calculations and pension deductions will continue exactly as they do now. Employees will not see any changes to their payslips, pension deductions or payroll processing.
Instead, HMRC will review records and contact eligible individuals directly, inviting them to accept the payment if they qualify. The payment will come from HMRC and is not a refund from the employer or an adjustment made by the pension provider.
Preparing for employee questions
As HMRC’s communications begin to arrive, employers may find that employees turn to their payroll team for clarification. A suggested simple message to share is that “your pension deductions have been calculated correctly in line with your pension scheme rules. The Low Earner’s Pension Payment is being administered directly by HMRC, who will contact eligible individuals and provide details of any payment due.”
Employers should also remind employees to remain vigilant against scams. HMRC will never ask for passwords, PIN numbers or a payment in order to release money owed to an individual.
Get in touch
As always, if you have any questions about payroll compliance or workplace pensions, you can get in touch using the button below.
