A payment is coming for Low Earners. Is Your Payroll Team Ready for the August Questions?

From August 2026, payroll teams should expect employee queries about the new Low Earner’s Pension Payment. HMRC will contact around one million eligible individuals directly, addressing the long-standing difference in pension tax relief between net pay arrangement and relief at source schemes.

The change matters because two employees can make the same workplace pension contribution but historically receive different outcomes depending on how their scheme gives tax relief.

Under a net pay arrangement, pension contributions are deducted before PAYE is calculated. This works well for employees who pay income tax because they receive relief through payroll. However, an employee earning around or below the Personal Allowance may have no income tax to reduce. Their pension deduction still comes from pay, but there is no tax relief to receive.

By contrast, a relief at source scheme deducts contributions after tax. The pension provider then claims basic-rate tax relief from HMRC and adds it to the pension pot.

The Finance No. 2 Act 2023 introduced the legal basis for this correction. Section 25 inserted section 193A into the Finance Act 2004, headed: “Net pay arrangements: relief where no income tax liability.” This provides for a top-up payment where a qualifying individual has pension contributions under a net pay arrangement but no income tax liability.

The payroll message to get right

• Employers do not need to apply, assess eligibility, amend payroll records or contact HMRC for employees.
• HMRC will identify eligible people and contact them directly, either by post or through their Personal Tax Account.
• Employees do not need to make a claim before receiving contact from HMRC.
• Eligibility is reviewed separately for each tax year, starting with 2024 to 2025.
• Employees may qualify where they earned close to the Personal Allowance, typically £12,570, and paid into a workplace pension using a net pay arrangement.

Let’s take a look at this in practice

An employee earns £12,000 a year and pays £100 into a net pay pension arrangement.

Their pension contribution is deducted before PAYE. But because they have no income tax liability, the deduction does not generate tax relief. Their take-home pay reduces by the full £100.

Another employee with the same earnings and £100 pension contribution in a relief at source scheme would usually pay £80 from take-home pay. The pension provider would claim £20 from HMRC, giving the pension fund a £100 contribution.

From August 2026

The employee in the net pay arrangement will continue to have pension contributions deducted through normal payroll. There is no payroll recalculation, revised payslip or pension deduction change.

Instead, HMRC will identify whether they are eligible for a Low Earner’s Pension Payment and invite them to accept it. The payment is designed to produce a more comparable outcome with relief at source arrangements.

Payroll professionals should be clear that this is not an employer refund, not a pension-provider adjustment and not a correction to historic payslips.

Payslip and employee rights

The Employment Rights Act 1996 requires employers to provide an itemised pay statement. Acas confirms that pension contributions are variable deductions that must appear on the payslip.

A useful response for employee queries is:

“Your pension deduction remains correct under the scheme rules. HMRC is managing the Low Earner’s Pension Payment separately. Please wait for HMRC to contact you and follow the instructions in its letter or Personal Tax Account.”

Remind employees that HMRC will never ask for passwords, PIN codes or a money transfer to release the payment.