OVER 1 million low earners will get a boost to their pay which could be worth up to a hundred pounds a year.
The government has confirmed a change to pensions tax relief that will see 1.2 million low-paid workers get an extra £53 on average paid into their pension.
More than 1 million low earners will get a pay boost in 2025
Around 200,000 will see an £100 increase in their take home pay.
Under the current system, millions of low-paid workers miss out on tax relief because of the way their employers’ choose to administer pensions contributions.
Around 75% of the people affected are women, according to the government.
The changes are designed to fix that inequality and make sure that everyone benefits from a government boost when saving for retirement.
The problem with the current system is employers have two options when it comes to pensions tax relief, one is called “relief at source”, while the other is called “net pay arrangement”.
Under Relief at Source, pensions contributions are taken from your post-income tax pay, but then the government adds back tax relief.
This means that everyone automatically gets 20% tax relief added to their contributions.
Higher and additional rate tax payers are entitled to more, but they have to claim this back via the government.
Under the Net Pay system (NPA), pensions contributions are made from your pre-tax pay.
Because you only pay income tax on the money you earn after pensions contributions, you end up paying less tax overall.
This works well for higher earners because they automatically get relief at their marginal rate of 40 or 45%.
But for people who earn less than £12,570, it means they don’t get any tax relief at all on their savings.
This also applies to people who have multiple jobs, but where each job earns less than the tax threshold.
This is because none of their income would have been taxed anyway, so they don’t benefit from the relief.
Financial secretary to the Treasury Lucy Frazer said: “We are correcting this injustice so low earners will get the same level of government support, no matter what type of pension they use.”
Under the new system, over a million lower earners will be able to get the tax relief.
Top-ups will start going into people’s bank accounts in the 2025-26 tax year, covering pension contributions from the previous tax year.
But experts from AJ Bell say it is a “scandal” that workers have to wait three years for their first payment, when the issue was first discovered ten years ago.
Tom Selby, head of retirement policy at AJ Bell, said: “Those on the lowest incomes – three quarters of whom are women – who have lost out as a result of this administrative cock-up.
“Those people will sadly continue to lose out for the next three years.”
Tom added that the money will be paid straight into bank accounts, rather than into a pension.
But this isn’t to say that people couldn’t then put the money into their retirement pot.”