Relief relating to net pay arrangements
Published 15 March 2023
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Who is likely to be affected
Individuals who save into an occupational pension under net pay arrangements (NPA) but whose total taxable income is below the personal allowance.
General description of the measure
This measure places a duty on HMRC, so far as is reasonably practicable, to make top-up payments directly to eligible individuals. HMRC will determine eligibility based on, if individuals have contributed to a net pay pension scheme and if their total taxable income is below the personal allowance. The measure will come into force for the tax year 2024 to 2025, with payments to be made as soon as possible after the tax year in which the contribution is paid. The payments will be chargeable to income tax.
Policy objective
There are two main methods of giving pensions tax relief. While they provide the same outcomes for most, low earners with taxable incomes below the personal allowance can have different levels of take-home pay depending on how their pension scheme is administered. Those in schemes using Relief at Source (RAS) receive a 20% top-up on their pension saving (even if they pay no income tax), whilst those in schemes using net pay arrangements receive tax relief at their marginal tax rate, such as 0%. The effect is that low earners in schemes using net pay arrangements have less take-home pay than they would if they were saving into a scheme that uses RAS.
The government believes it is right to rectify this anomaly. The government will pay a top-up to low earners making contributions to pension schemes using a net pay arrangement in 2024 to 2025 onwards. In the following tax year, HMRC will notify those who are eligible and invite them to provide the necessary details for the top-up to be paid direct to their bank account.
As a result of this change, low earning pension savers, with total taxable incomes below the personal allowance, should receive similar outcomes regardless of how their pension scheme is being administered for tax purposes.
Background to the measure
The government launched a Call for Evidence that ran between 20 July 2020 and 13 October 2020. The Call for Evidence set out the three reform principles for any changes: simplicity, deliverability, and proportionality. The response (published in October 2021) committed the government to introducing a top-up payment to low earners in net pay arrangements, seeking to broadly equalise the take-home pay with comparable low earners in RAS arrangements.
The policy was announced in the Autumn Budget 2021, and draft legislation was published at Legislation Day in July 2022.
Detailed proposal
Operative date
The measure will have effect on 6 April 2024.
Current law
The current law on tax relief on pension contributions through net pay arrangements is contained in section 193 of Finance Act 2004.
Proposed revisions
The measure will introduce a new section (193A) into the Finance Act 2004. The section will apply where an individual is entitled to be given relief in accordance with section 193 (that is under net pay arrangements) in respect of the payment of a contribution under a pension scheme, and there is no amount in respect of which the individual is liable to pay income tax in the year in which the contribution is paid.
The measure places a duty on the Commissioners for HMRC to make arrangements, so far as reasonably practicable, to pay to eligible individuals the appropriate amount in relation to the contribution. The appropriate amount, in relation to a contribution, is an amount equal to income tax relief not already received on the contribution at the relevant rate. The Commissioners are required to pay the appropriate amount as soon as reasonably practicable after the tax year in which the contribution is paid.
For the purposes of income tax, the amount paid will be chargeable and the relevant rate is the basic rate of tax based on the individual’s residency.
Summary of impacts
Exchequer impact (£m)
| 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 |
|---|---|---|---|---|---|
| — | — | — | — | -10 | -15 |
These figures are set out in Table 5.1 of the Autumn Budget and Spending Review 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget and Spending Review 2021.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure will impact on an estimated 1.2 million individuals by providing a top-up payment to eligible low earners saving into a pension under net pay arrangements. Individuals will not need to confirm their entitlement as HMRC will identify those eligible individuals based on information already provided. However, individuals will need to confirm or provide their payment details via a digital service for the top up payment to be made.
This measure is not expected to impact on family formation, stability, or breakdown. Customer experience is expected to remain broadly the same as it does not significantly alter how individuals interact with HMRC.
Equalities impacts
It is anticipated that this measure will have a positive impact on some low earners. All low earners in schemes using net pay arrangements will be eligible for the top-up payments. HMRC will identify eligible individuals and make arrangements to pay them directly.
From April 2024, an estimated 1.2 million people, will be eligible for the top-up. Women are estimated to make up 75% of those earning below the personal allowance and contributing to a pension scheme that uses net pay arrangements.
Impact on business including civil society organisations
This measure is not expected to impact on businesses. However, it is expected to impact some civil society organisations that may provide support or financial advice to low earners. One-off costs may include familiarisation with this change. There are not expected to be any continuing costs. Customer experience is expected to remain broadly the same as it does not alter how those civil society organisations interact with HMRC.
Operational impact (£m) (HMRC or other)
HMRC will need to deliver IT changes to support safe delivery of this policy and incur operational costs whilst administering it. These costs are estimated to be in the region of £38 million.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
HMRC will monitor the delivery of the policy as part of the Pensions Transformation Programme.
Further advice
If you have any questions about this change, contact the Pensions Policy Team at HMRC on telephone: 03000 512336 or email: pensions.policy@hmrc.gov.uk.