There was much confusion about the two methods of tax relief, made considerably worse by the inappropriate titles attached to them:

• Relief at Source (RAS) – where the source of the tax relief is HMRC who provide additional savings at basic rate tax after a claim made by the pension provider, with the expectation that higher rate taxpayers would understand that to get any additional top up they were entitled to they had to take action through the self-assessment system‍
• Net Pay Arrangement (NPA) – the source of the tax relief is the employer who, despite the suggestion in the title, is required to reduce taxable gross pay to offer the relief at the employee’s highest marginal rate of 20%, 40% or 45%, with no action required by the employee or the pension provider.

So far, so confusing, but then it soon became clear that there was another nuance that mandatory auto-enrolment was going to trip over: how do you offer tax relief in an NPA scheme to those who must be auto-enrolled as they earn more than the auto-enrolment threshold of £10,000, but less than the income tax threshold?

Reducing their taxable pay achieves nothing. In contrast for schemes operating RAS, all employees receive the 20% tax relief top up regardless of their earnings.

Far too many private sector employers with a low wage profile (think hospitality, care workers often part-time and female), chose their pension provider with no thought about tax relief. They then found they had signed up to a provider that only offered Net Pay Arrangement (of course because the provider didn’t have to do any work, the employer did it instead!). It was only by chance that Nest became a Relief at Source scheme, because it offered pensions to the self-employed, who clearly didn’t have a payroll department and therefore Net Pay Arrangement was never going to be a possibility.

And then there is the public sector. Public service pension schemes were set up as Net Pay Arrangements, again because the employer would do the work and equally because the majority of members were taxpayers when they were created, and the highest paid employees making the initial decisions would have to do nothing more to claim their additional 40% or 45% tax relief. A number of organisations and individuals, me amongst them, picked up the unfairness of this lost tax relief which affects 1.75m people, 75% of whom are women. The Conservative manifesto of 2019 committed the party to addressing the issue and then in 2021 they announced that a top up system would be introduced and the lost tax relief paid directly to the affected individuals. Legislation was introduced in 2022, with an expected introduction for the current tax year. However, a decision was made:

• that the lost tax relief would not be backdated to 2012 when auto-enrolment began, but only paid from 2024/25 onwards,
• that it would only be available after the end of each tax year, so from 2025/2026
• and that it would need to be claimed from HMRC rather than paid automatically, and
• would be paid at the appropriate English, Welsh or Scottish basic rate of tax for the tax year concerned.

However in January of this year a paragraph in the Pensions’ Schemes newsletter announced that claims for the top-up would not be introduced until an unspecified date in 2026, although entitlement would still be backdated to 2024/25. It is unclear what publicity campaign is envisaged to drive awareness of the annual claim that will be required from all the affected individuals, but this is an area where MNTs can definitely add value. This might be:

• Ensuring HR and benefits’ teams understand the tax relief method operated by their pension scheme and whether there are sections of the workforce that have been adversely affected. Equally, that making a top-up claim will not affect anybody’s state benefits but is classed as taxable income
• Creating content for scheme and employer websites/newsletters
• Liaising with Unions to drive awareness of entitlement, the claim process and the interaction with self-assessment tax returns, or
• In non-unionised organisations, briefing employee focus groups.

Regardless of the value of tax relief lost, this should not have been allowed to continue for as long as it has. It should not have been delayed yet again and it should be properly backdated as so much of the government’s current focus is about supporting the interests of savers. However, as MNT’s we can ensure that our members don’t lose out on this valuable addition to their pension funds going forward by being at the forefront of communicating this new entitlement.