Nearly one million people are set to receive an unexpected letter from HMRC telling them they could be owed money.
The typical payment will be around £70, although the amount will vary depending on individual circumstances.
The letters are going out to people who saved into workplace pensions but are on low incomes. They missed out on pension tax relief because of the way their scheme was run.
HMRC is sending the letters out gradually over the next few months, but experts are concerned that many people may ignore the letters, assuming they are a scam, meaning millions of pounds could go unclaimed.
Here, we explain why HMRC is sending the letters, who could get the money and what you should do if one lands on your doormat.
Why is HMRC sending people money?
The payment is designed to fix a quirk in the pension system which meant some low-paid workers got less tax relief than others.
People of working age get tax relief on pension contributions at their marginal rate – so basic rate payers – those earning £12,570 and £50,270 – get 20 per cent income tax relief on contributions.There are two main ways pension tax relief is given – relief at source and a net pay agreement.
With relief at source, you pay into your pension from your take-home pay and HMRC adds 20 per cent basic-rate tax relief. So, an £80 contribution becomes £100. You can receive this top-up even if you do not pay income tax, because you earn under £12,570.
With a net pay arrangement, pension contributions are taken before income tax is calculated. A basic-rate taxpayer paying £100 into their pension therefore saves £20 in tax.
The two systems broadly produce the same result for taxpayers, but they do not work the same way for someone who does not pay income tax.
Under automatic enrolment, introduced in 2012, people can be put into a workplace pension while earning below the income tax threshold.
If their employer uses relief at source, they can still get the 20 per cent top-up. But if the employer uses net pay, there is no income tax bill to reduce, meaning some low earners used to receive no tax relief.
In 2021, the Government announced a plan to end the discrepancy and said it would apply from the 2024/25 tax year. It has now finally started to write to people about what it is calling the Low Earner’s Pension Payment, for those whose employers used net pay and caused them to miss out on relief.
Sir Steve Webb, former pensions minister and partner at LCP, warns: “The process of getting these payments to the right people is going to be incredibly painful, and there is a real risk of huge non-take-up.”
Who could get the £70 and when will letters arrive
The payment is aimed at people who paid into a workplace pension using a net pay arrangement but earned too little to benefit from income tax relief.
HMRC says people who earned close to the personal allowance, currently £12,570, are likely to be affected.
The first payments cover the 2024/25 tax year. Eligibility will then be assessed for later years, meaning some people could receive payments more than once.
HMRC will use information it holds to work out who qualifies.
The letters are being sent out gradually. HMRC says payments for 2024/25 are expected to begin in the coming months, with the programme continuing into early 2027.
Is the letter genuine?
People are constantly warned about tax scams and fake HMRC refunds. Now the tax authority is genuinely sending almost one million people letters telling them they are entitled to money.
Sir Steve said: “Most people will not have a clue about this issue and may be suspicious of a letter out of the blue from HMRC offering them free money.
“Some may suspect it is a scam. It is vital that communications are effective to make sure that people get the money to which they are entitled.”
HMRC says it will contact eligible people by post or through their personal tax account. It will not text, email or phone people about these payments.
If you are unsure whether a letter is genuine, check HMRC’s correspondence through GOV.UK rather than using links or contact details in an unexpected message.
What should I do if I receive the letter?
If you get the letter, you will need to provide or confirm your payment details before the money can be paid.
People who cannot use HMRC’s digital services will have an alternative way to accept the payment.
If you have not received a letter yet, there is no need to contact HMRC to ask whether you qualify. HMRC says eligible people should wait to be contacted.
Why experts are worried people will miss out
HMRC has identified people who may be owed money. The bigger challenge could be getting them to claim it.
Jon Greer, head of retirement policy at Quilter, said: “The positive aspect is that HMRC is now taking steps to make good on those missed payments and eligible individuals do not need to identify themselves to HMRC, as HMRC will determine eligibility using information it already holds.
“However, the process itself may prove a hurdle for some. The real test of this reform is not whether HMRC can identify a million eligible people, but whether those people actually receive the money.
“In an environment where consumers are constantly warned about scams, some may understandably view an unexpected message about a payment from HMRC with suspicion.
“It is therefore important that people know HMRC will not text, email or call about these payments and should only respond through official HMRC channels.”
Kenny MacAulay, CEO of software company Acting Office, also said HMRC writing letters to a million people would be “a slow and ineffective way” for people to find out that they’re owed money and would lead to significant numbers not claiming.
A HMRC spokesperson said: “Customers don’t need to apply or contact us – we’ll send them information about how to receive their payment via post or their online tax account. We know some people may be cautious about unexpected contact, which is why we provide clear information about what to expect and how to verify the contact is genuine.
“Customers can check a letter is genuine on GOV.UK and should only respond via official HMRC channels. We’ll never ask for passwords, PINs or money to be transferred to claim a payment.”
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