Blow for 1.2million low earners as government DELAYS pay boost worth up to £100 a year

AROUND 1.2million low-income workers face a delay to a wage boost that was meant to kick in from this year worth up to £100.

The taxman confirmed to The Sun that it has delayed introducing a top-up for lower earners by one year to avoid issues with benefit entitlements or National Insurance (NI), so they now won’t get the boost until 2026.

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HMRC has delayed the timetable to next year because of IT complexities[/caption]

In 2022, the government updated some complex rules around pension tax relief to make the system fairer for certain low income workers who have been missing out on a boost to their pay.

More than one million of the lowest earners have not received any tax relief on their pension contributions for years because of the way their employers administer them.

The government said it would fix this inequality – known as the “low earner anomaly” – by paying a cash top-up to those affected each year.

When the policy was first announced, the government said around 1.2million people would be eligible for a pay boost from 2024/25, with around 200,000 set to see a £100 increase in their take home pay.

The average beneficiary is now expected to receive around £70 a year, and that was meant to kick in from 2025.

But this has now been delayed until 2026.

It is understood that this is because the current solution would have negatively impacted benefit entitlement and NI, so the government has had to simplify the process.

A spokesperson for HMRC told The Sun: “The delivery timetable has been extended to ensure these payments won’t impact benefit entitlement or National Insurance.

“Top-up payments relating to the 2024-25 tax year, expected in 2025-26, will be made later in 2026. Subsequent payments for future years will go ahead as planned.”

What is the issue with pension tax relief?

When you join a workplace pension scheme, you contribute some of your salary to the company pension and your employer adds some too.

You then get “tax relief” on your pension contributions from the government as an incentive for saving into your pension scheme.

There are two ways this is administered – either via “relief at source” or “net pay” arrangements.

Relief at source is where your pension contributions are deducted from your pay after tax is calculated.

Your pension scheme then claims back the tax relief from the government and adds it to your pension.

So, for example, if you’re a basic rate taxpayer, the scheme will claim 20% back from the government and use it to top up your pot.

This process happens even for those earning below the threshold to pay any tax – currently £12,570 a year – so those people still get a 20% boost despite paying no tax.

But for those in a ‘net pay’ arrangement, their contribution is taken before their tax is calculated, so they receive tax relief at their marginal rate of tax.

So for anyone who is paid under £12,570, their marginal tax rate is 0%, so they don’t receive any relief at all.

The government is now fixing this inequality to ensure everyone benefits from the government incentive to save into their pension.

But the changes were intended to kick in this year, with workers due to get up to £100 – or an average of £70 – for the 2024/2025 tax year.

However, HMRC has revealed that this has been delayed until 2026.

Workers will still get the top-up for the 2024/2025 tax year, but won’t see it for another year.

The taxman explained: “Top-up payments for individuals will still be made for the 2024 to 2025 tax year and subsequent years, but the payments for 2024 to 2025 are likely to be offered later than planned — in 2026.”

Steve Webb, former pensions minister, now consultant at LCP, said over one million people have been missing out for years and it’s important they are paid as soon as possible.

“There have been promises of action for years, but we now learn that payouts are going to be further delayed,” he told The Sun.

“This group of workers has on average missed out on tax relief in 2024/25 of around £70 but will not get this money back until well into next  year, by which time they will have missed out on another £70 for 2025/26.   

“It is vitally important that HMRC get this scheme up and running swiftly and make sure that as many people as possible get the payments to which they are entitled”.

How will I get the top up if I am affected?

HMRC will contact any individuals affected to request their bank details.

It will then deposit the payment directly into their bank accounts rather than into their pension funds.

To benefit from the scheme, workers need to answer “yes” to the following questions at the end of the current tax year:

1. Is your taxable income less than £12,570 (after pension contributions)?
2. Have you made personal contributions into a workplace pension?
3. Does your pension provide tax relief through the “net pay” arrangement?

The payment amount will correspond to the income tax due on the pension contribution.

So, for example, if a person has contributed £500 to an occupational pension via a net pay arrangement, HMRC will transfer £100 to their bank account.