HMRC’s ‘free money’ letters may be mistaken for a scam

Around one million low earners may be contacted by HMRC about a payment relating to tax relief they missed out on through their workplace pension. LCP has warned that some recipients may mistake the correspondence for a scam. The amount payable will depend on individual circumstances.

The payment is intended to compensate people who paid into workplace pensions operating under Net Pay Arrangements who received less tax relief than comparable workers in relief at source schemes. The payments should begin gradually over the coming months. Around three quarters of those expected to benefit are women.

HMRC will contact eligible people in stages, either by post or through their Personal Tax Account, with the process continuing into early 2027.

Why are people receiving these payments?

People who pay into a personal pension, or any scheme using the ‘relief at source’ method, pay into their pension from the money that they take home. HMRC will then add tax relief at the basic rate of 20%, which would mean an £80 contribution would be topped up by £20 from HMRC, to make a total contribution of £100.

However, some occupational schemes use the Net Pay Arrangement (NPA), which means the pension contribution is deducted before income tax is calculated. So, tax relief is provided through a reduction in the person’s income tax bill, rather than being added to the pension by HMRC.

Someone who pays £100 into a pension through this route gets £100 in their pension pot, but if they are a basic-rate taxpayer, they save £20 in income tax because their taxable income is reduced, and the contribution costs them £80, according to Sir Steve Webb, partner at LCP and former pensions minister. However, someone who pays no income tax may receive no tax saving through a net pay arrangement. The new payment is intended to address this disadvantage for eligible low earners.

As you usually don’t have a choice about how your employer deals with your pension contributions, successive governments have taken the view that this is unfair and needs to be addressed. So, the aim is that for contributions from 2024/25 onwards, eligible people who missed out on some or all the tax relief will be able to receive a top-up if their workplace pension uses the NPA method, according to LCP.

Once those affected are registered, a more automated system is expected to be used for later years if they’re still eligible for these rebates. Sir Steve added: “What is not yet clear is the likely take-up of this payment. The initial exercise is in respect of financial year 2024/25 but further rounds of payments will be made for succeeding years.”

Eligible people should wait for HMRC to contact them, then follow the instructions to accept their payment. If you are unsure whether a message is genuine, check it using official GOV.UK guidance before providing information. HMRC will never ask for money transfers, PINs or passwords.

Please note: This article provides general information based on guidance available at the date of publication. Eligibility and payment amounts depend on individual circumstances. Please seek advice about your own position and check that any HMRC correspondence is genuine before responding.