Autumn Budget 2021 Net Pay Pension Scheme Problem Fixed

Published / Last Updated on 29/10/2021

There has been a tax relief issue for Net Pay Pension Schemes for many years.

How does a Net Pay Scheme work?

If you personally pay into a personal pension plan, you get given tax relief at source automatically.  E.g. you pay in £80, tax relief of £20 is added automatically by the pension scheme and reclaimed from HMRC. 

For many company pension schemes, they operate on a Net Pay Arrangement.  For example, if you earn £2,000 per month and you pay £100pm gross into a pension.  The £100 contribution is deducted from your gross pay before tax i.e. you then pay income tax on the lower pay amount of £1,900 meaning you have had tax relief indirectly by paying £20 lower tax, so your net position is you still paid net £80 into a pension but £100 went on.

The Problem:  if you are a non-tax payer e.g. earn below the personal tax allowance but still pay into the company pension scheme, you do not get any tax relief as you never had any income tax deducted from your pay anyway. This is unfair on lower earners paying into pensions.

Government Solution: Top Up Scheme

The Autumn 2021 Budget announced a new ‘Government Top Up Payment Scheme’ that will start from tax year 2024/25 and be paid in 2025/26 where the government will make top up payment to those affected.  This is great news for low earner, non-tax payers and their pensions but sadly, it will not be backdated.

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