What Is the Net Pay Anomaly?
The net pay anomaly is a long-standing flaw in the UK pension tax relief system that caused low-paid workers in net pay pension schemes to miss out on tax relief entirely. It existed because of how the two different methods of providing pension tax relief – relief at source and net pay – treat people who earn below the personal allowance.
Under relief at source, a pension provider claims 20% basic rate tax relief from HMRC and adds it to every member's pension, regardless of whether they actually pay income tax. A person earning £10,000 per year and contributing £400 to a relief-at-source pension would see their provider add £100, giving them £500 in their pension.
Under net pay, contributions are deducted before tax is calculated. For someone earning above the personal allowance, this works perfectly – they pay less tax automatically. But for someone earning £10,000 (well below the £12,570 personal allowance), they were not paying income tax in the first place. Deducting pension contributions before calculating tax made no difference – they received zero tax relief.
Who Was Affected?
The net pay anomaly primarily affected:
- Part-time workers earning below the personal allowance of £12,570
- Workers with multiple low-paid jobs where each job paid below the threshold
- Young workers and apprentices on lower salaries
- Workers in sectors dominated by public sector net pay schemes such as the NHS, local government, and education
The anomaly disproportionately affected women, who are more likely to work part-time. Industry estimates suggested that around 1.2 million workers were affected each year, losing an average of £50 to £100 annually in pension tax relief they should have received.
The Scale of the Problem
| Annual Earnings | Pension Contribution (5%) | Relief at Source Bonus | Net Pay Relief | Annual Loss |
|---|---|---|---|---|
| £8,000 | £400 | £100 | £0 | £100 |
| £10,000 | £500 | £125 | £0 | £125 |
| £12,000 | £600 | £150 | £0 | £150 |
| £12,570 | £628.50 | £157.13 | £0 | £157.13 |
While individual amounts may seem modest, compounded over a working lifetime the impact on retirement savings is significant. A worker losing £100 per year over 30 years, with investment growth, could be £5,000 to £7,000 worse off at retirement.
Why Did It Take So Long to Fix?
The anomaly was widely recognised by the pensions industry, trade unions, and consumer groups for many years. Several factors delayed a resolution:
- Technical complexity – HMRC lacked a straightforward mechanism to make payments to net pay scheme members
- Cost – the Treasury would need to fund annual top-up payments worth hundreds of millions of pounds
- Data challenges – identifying who was affected required matching pension contribution data with tax records
- Legislative priorities – other pension reforms (auto-enrolment expansion, lifetime allowance changes) took precedence
The government announced in 2020 that it would introduce a legislative fix, but implementation was delayed until April 2025.
The 2025 Fix: How It Works
From 6 April 2025, HMRC introduced an automatic top-up payment system for low earners in net pay pension schemes. Here is how the fix operates:
- Identification: HMRC uses Real Time Information (RTI) data submitted by employers to identify workers earning below the personal allowance who contribute to net pay pension schemes
- Calculation: HMRC calculates a top-up payment equal to 20% of the worker's pension contributions for the tax year
- Payment: The top-up is paid directly to the individual (not into the pension scheme) via their bank account or by cheque
- Timing: Payments are made after the end of the tax year, typically in the autumn, once HMRC has reconciled all RTI data
What if the payment does not arrive?
If you believe you are eligible but have not received a top-up payment, you should:
- Check that your employer is submitting pension contribution data correctly through RTI
- Ensure HMRC has your current bank details (check through your Personal Tax Account at gov.uk)
- Contact HMRC's Income Tax helpline on 0300 200 3300 if no payment arrives by December following the end of the tax year
Limitations of the Fix
While the 2025 fix is a significant improvement, it has some limitations:
- Not retrospective: The fix only applies from April 2025 onwards. Tax relief lost in previous years cannot be reclaimed
- Payment goes to the individual, not the pension: The top-up is paid as cash, not added to the pension pot. To get the same benefit as relief-at-source members, you would need to voluntarily reinvest it into your pension
- Timing delay: Payments arrive after the end of the tax year, whereas relief-at-source members get the benefit immediately when contributions are made
- Depends on employer data accuracy: If your employer does not report pension contributions correctly through RTI, the payment may not be triggered
What You Should Do Now
If you earn below the personal allowance
Check whether your workplace pension uses net pay or relief at source. If you are in a net pay scheme, you should now be receiving annual top-up payments from HMRC from the 2025/26 tax year onwards. Make sure your bank details are up to date with HMRC through your Personal Tax Account.
If you are an employer
Ensure that your payroll system is correctly reporting pension contributions through RTI submissions. The accuracy of these reports directly determines whether your low-paid employees receive their top-up payments.
If your earnings fluctuate
If your earnings vary month to month and you sometimes earn above and sometimes below the personal allowance, HMRC will assess your eligibility based on your total annual earnings and contributions. You may receive a partial top-up for the proportion of your contributions that relates to earnings below the threshold.
Impact on Auto-Enrolment
The net pay anomaly was particularly concerning in the context of auto-enrolment. Millions of workers were automatically enrolled into workplace pensions, with no choice over which scheme their employer selected. Those enrolled into net pay schemes and earning below the personal allowance were effectively penalised for saving – their take-home pay was reduced by contributions, but they received no tax relief in return.
The 2025 fix ensures that auto-enrolment delivers fair outcomes regardless of which type of scheme an employer uses. This is important for maintaining public confidence in workplace pensions and the auto-enrolment system.
Looking Ahead
The resolution of the net pay anomaly is a positive step, but questions remain about whether the two-system approach to pension tax relief should continue at all. Some industry commentators have suggested moving to a single universal system – either all relief at source or all net pay – to eliminate complexity and the possibility of future anomalies.
For now, the dual system remains, and understanding which type of scheme you are in continues to be important for ensuring you receive your full pension tax relief entitlement.