The Government has pledged to fix a tax loophole that prevents low-paid workers from receiving pension cash paid to their better-off colleagues, but not before 2025.

Critics who demanded action welcomed the Autumn Budget announcement, but one said it was a ‘pity’ that the move would not be made sooner.

Another pointed out that low-income earners will have lost millions of Pounds due to the Government’s ‘years’ of dithering.

The tax flaw means that low-paid staff are not receiving government payments to their pension funds. This depends on the type and operation of their employer’s scheme, which they have no control.

Tax flaw: Some poorly paid staff currently lose Government payments into their pension pots

Tax flaw: Unpaid staff are currently losing Government payments to their pension pots

To rectify this, the Government will pay top-up payments to low-earning people who have saved into a pension plan and are not getting the benefits. This will be in the 2025/2026 tax years.

It says an estimated 1.2million individuals could benefit by an average of £53 a year. But, low-paid workers can lose hundreds of pounds a year in government pension cash. Find out how below.

Because of the compound effect of investing over long periods, this money could eventually turn into a substantial pot.

The announcement today by the Government was a victory to Ros Altmann (the Tory party’s former pensions minister), who has campaigned vigorously for this issue. 

Lady Altmann expressed her delight that the Treasury would finally solve the problem of some workers being forced into paying an additional 25 percent for their pensions. 

She stated, “I had hoped that this would be done sooner, but at least there is a commitment for change to the system, which is something I am very happy about.”

“These low-paid workers don’t even realize they pay so much more for the same type of pension than they would receive elsewhere because their employer chose a different scheme.

“It took five long years to get the Government to address this problem, which affects more that a million women working in the lowest paid jobs.

Lady Altmann: 'At last there is a commitment to change the system, which I am very pleased about'

Lady Altmann: “At last, there is a commitment for changing the system. This is something that I am very happy about.”

Hymans Robertson, a pension consultancy, also welcomed the decision. A few years ago, Hymans Robertson conducted an investigation and found that 14 of 17 top pension companies used the system where low-paid workers are excluded.

Partner Mike Amber said: ‘It is great to see the Government announcing that it’s at last abolishing this inequality for low earners.

“We support all incentives for individuals to save and to engage with pensions and have been calling on these technical inequalities since many years.

It will be a welcome development for the nearly a million people who have saved into pensions. It is a shame these savers will need to wait for the changes to become effective and to finally be able benefit from them.

Jon Greer, Quilter’s head of retirement policy, stated that the Government had finally committed to reducing the inequalities for low-earners after much posturing.

‘However, the problem won’t be fixed until tax year 2025/26 and will only include contributions made from 2024/25, meaning these low earners will have forgone millions in pensions tax relief due to years of dithering.

‘By the time it is eventually fixed in 2024, almost £335million will have been lost in pension funds by 1.2million lower earners, three quarters of whom are women.’

Greer said the tax flaw means some workers earning £12,570 a year or less could retire with a pot worth thousands of pounds less than others.

“This is a lottery that depends on the tax system they end-up in. The Government’s solution is imperfect, but at least better than the current situation, as it commits to paying a top-up contribution directly to the person’s bank account.

“This means that they will lose out potential growth by not having money in the pension funds and also there is a risk that the pension contribution will not be made and the top-up may not be received.

Greer said that the Government announcement suggested that the payments could have an impact on income-related benefits such as universal credit.

Why are some low-earners losing their pension top ups?

Because of an obscure tax system, low-paid workers may miss out on hundreds upon hundreds of pounds in government pension cash each year.

This is because the Government has frozen the earnings threshold at which people are automatically enrolled into pensions at £10,000. Meanwhile, the personal allowance, the level at which people start to pay tax, is currently ££12,570.

Some people who earn between these two amounts lose pension tax top ups. But, the tax mechanism used in your work pension plan will determine if you are eligible.

Both employees and employers have two options for handling pension tax relief. These are known in financial jargon, net pay or relief at source.

Master trusts that manage centralised funds for many employers at once use net pay. This is convenient for high-paid staff, but penalises lower-earning employees.

Net pay is the amount of money workers contribute to their pension directly before their tax bill is calculated. Therefore, their pension tax relief has already been included and they don’t need to claim it from HMRC.

Under relief at source, the pension provider receives the income tax relief directly through HMRC and adds it into each worker’s pension.

Steve Webb, Money’s columnist on pensions, explains more here.


Affiliate links may appear in some of the links. Clicking on these links may earn us a small commission. This helps us to fund This Is Money and keeps it free of charge. We don’t promote products through articles. We don’t allow any commercial relationship to influence our editorial independence.