Net Pay vs Relief at Source Fix: What's Changing in 2026?

Published 30 March 2026 • 7 min read

For years, a quirk of the UK pension system has meant that some of the lowest-paid workers effectively lose money when they save into a workplace pension. The so-called net pay anomaly has quietly penalised around 1.75 million people — predominantly women and part-time workers earning between £10,000 and £12,570 per year. In 2026, HMRC is finally rolling out a fix. Here is what happened, why it matters, and what changes for you.

How Pension Tax Relief Works in the UK

Before understanding the anomaly, it helps to know how pension tax relief works. There are two methods employers use to apply tax relief on workplace pension contributions:

• Relief at source (RAS) — your employer deducts pension contributions from your pay after tax. The pension provider then claims basic rate tax relief (20%) from HMRC and adds it to your pot. If you contribute £80, your pot receives £100
• Net pay — your employer deducts pension contributions from your pay before calculating income tax. You automatically pay less tax, so the relief is built into your pay packet. There is no separate claim to HMRC

For most earners, both methods produce the same result. The problem arises for people who earn below the personal allowance of £12,570 — they do not pay income tax at all.

The Net Pay Anomaly Explained

Under relief at source, the pension provider claims 20% tax relief from HMRC regardless of whether the member actually pays tax. This means a non-taxpayer contributing £80 still gets £100 in their pension pot — effectively a bonus from the government.

Under net pay, contributions are deducted before tax. But if you do not earn enough to pay tax, there is no tax saving to be had. You contribute £100 and your pot receives £100. There is no mechanism for HMRC to add a top-up because the relief was supposed to come through the payroll — except there was no tax to relieve.

The result is that a low earner in a net pay scheme contributes 25% more of their own money for the same pension outcome compared to someone in a relief at source scheme. Two people earning the same salary, doing the same job, saving the same percentage — but one ends up worse off purely because of which method their employer chose.

What Is Changing in 2026?

The government announced a fix in the 2024 Autumn Budget, with implementation beginning in the 2025/26 tax year. HMRC will make direct top-up payments to individuals affected by the net pay anomaly. Here is how it works:

• Automatic identification — HMRC will use Real Time Information (RTI) payroll data to identify people earning below the personal allowance who are contributing to net pay pension schemes
• Direct payment — affected individuals will receive a top-up payment directly from HMRC, equivalent to 20% of their pension contributions
• No action required — the process is designed to be automatic. You should not need to claim or fill in forms
• Paid annually in arrears — the top-up will be calculated after the end of each tax year and paid directly to the individual, not into the pension pot

How Much Could You Receive?

The amount depends on how much you contribute to your pension and how much of your income falls below the personal allowance. Here are some examples based on typical contribution levels:

While these individual amounts may seem modest, the cumulative impact over a career is significant. A worker earning £11,000 and contributing 5% to a net pay scheme has been losing £110 per year. Over a 30-year career, that adds up to £3,300 in lost contributions — and substantially more when you factor in compound investment growth.

Limitations of the Fix

While the 2026 fix is welcome, it is not perfect. There are several important caveats:

• Not retrospective — the fix applies from 2025/26 onwards. There is no compensation for the years of lost tax relief that affected workers have already experienced
• Paid to the individual, not the pension — the top-up goes into your bank account, not your pension pot. You would need to voluntarily pay it into your pension to get the full intended benefit
• Annual arrears — there will be a delay between making contributions and receiving the top-up, which reduces the compounding benefit
• Relies on RTI data accuracy — the system depends on employers reporting payroll data correctly through HMRC's Real Time Information system

What You Should Do

• Check your pension scheme type — ask your employer or pension provider whether your scheme operates on a net pay or relief at source basis. Your payslip may also show this
• Keep your details up to date — ensure HMRC has your correct bank details and address so any top-up payment reaches you
• Consider reinvesting the top-up — if you receive a payment from HMRC, think about paying it into your pension or an ISA to maximise the long-term benefit
• Check your tax code — if your income fluctuates around the personal allowance, check your tax code is correct to avoid complications

Key Takeaways

• The net pay anomaly has penalised around 1.75 million low earners, mostly women and part-time workers, by denying them pension tax relief
• From 2025/26, HMRC will make automatic top-up payments to affected individuals
• The fix is not retrospective — historic losses will not be compensated
• Top-ups are paid to your bank account, not your pension pot — consider reinvesting them
• Check whether your employer uses net pay or relief at source to understand if you are affected