Tax relief from HMRC – a genuine offer

‘Make a pension contribution and you get tax relief’ – it sounds straightforward, but it’s not quite so simple.

There are two methods by which tax relief on pension contributions is given:

• Pension relief at source (PRAS): This applies to personal pensions and some occupational pension schemes (including the National Employment Savings Trust). Contributions are made from after-tax pay, and then HMRC pays basic rate relief to the pension provider. For example, if you make an £80 contribution under PRAS, HMRC adds £20, bringing the total contribution to £100. The £20 top-up applies even if you are a non-taxpayer. However, if you pay tax at more than the basic rate, you must claim the extra relief from HMRC – something that can be forgotten.
• Net pay arrangement (NPA): Most occupational schemes use the NPA under which contributions are deducted from pre-tax pay. Thus, the same £100 total contribution would save the basic rate taxpayer £20. For higher and additional rate taxpayers (and the assorted Scottish rates), the appropriate relief is automatically given, with no need to claim. However, non-taxpayers miss out on the 20% relief they would receive under PRAS.

The missing basic rate relief for non-taxpayers under NPA was long seen as an anomaly. Successive governments ignored the point until automatic enrolment in workplace pensions significantly increased the numbers – mostly part-timers – who were losing out.

Since 2014/15, automatic enrolment has applied with an earnings threshold for enrolment that has been frozen at £10,000 a year. That figure initially matched the income tax personal allowance, but a threshold freeze meant a gap subsequently opened. Since 2021/22, the threshold has been £2,570 less than the (now frozen) personal allowance.

In the Autumn Budget 2021, the then Chancellor announced that legislation would be introduced to ensure that all pension contributions effectively received basic rate tax relief. The eventual solution was to make HMRC responsible for paying the relief to eligible non-taxpayers, starting with contributions made in the 2024/25 tax year.

HMRC has now started writing to about one million people, asking them to claim their 2024/25 relief, which, on average, is estimated to be £53. Communications from HMRC offering to pay you money are often scams. In this instance, the giveaway is genuine.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.