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Around a million low earners are being contacted by the UK tax authority in a mass letter-writing campaign inviting them to claim missed pension tax relief top-up payments.
But a former pensions minister has warned that huge numbers of affected pension scheme members, the vast majority of which are women, might ignore the offer for fear of mistakenly thinking they are being scammed.
Pension tax relief is a government top-up, or refund, on payments made into a pension scheme that essentially gives back the income tax that was paid on those contributions. Tax relief is one of the main attractions for using a pension as a means of building up a retirement fund.
According to HMRC, low earners who suffered from a discrepancy in pension payouts, first spotted eight years ago, are finally due to receive compensation. Payouts will typically be worth between £53 and £70.
The situation came about because of a difference in the way pension tax relief rules are applied to ‘net-pay’ and ‘relief-at-source’ schemes.
It is members of the former that are affected here, especially workers earning between £10,000 a year, the starting point for automatic enrolment in workplace pensions and £12,570, the annual income tax personal allowance.
Under a net pay arrangement, workers between these limits miss out on tax relief on pension contributions because there is no income tax to deduct it from.
HMRC said affected workers do not need to get in touch but will be sent information on how to receive their payment via post or their online tax account.
HMRC never asks for money transfers nor PIN codes/passwords. Texts, emails, or calls purporting to come from the organisation are likely to be scams.
A spokesperson added: “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.”
But former pensions minister, Steve Webb, now a partner at consultants LCP, warned: “The process of getting these payments to the right people is going to be incredibly painful and there is a real risk of non-take-up.
“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.”
More than £100 billion currently held in savings accounts paying a guaranteed return will mature by the end of the year, leaving savers potentially at risk of receiving significantly less in the way of interest going forward.
Analysis from Skipton Building Society (SBS) of UK savings data showed that £119.6 billion held in fixed-rate savings accounts will need to find a new home between September 2026 and the year-end.
Many accounts were opened during a time of higher interest rates which, if left unattended, could be automatically transferred to lower-paying, variable-rate products reducing the returns that savers receive on their cash.
Alex Sitaras, SBS head of savings and partnerships, said: “There is a real risk that people could miss out simply by leaving their money where it is.
“Too often, people focus on the rate they opened the account with and forget to review what happens when the deal ends. The difference between a competitive rate and a lower variable rate can have a meaningful impact on returns over time.”
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More than a third of workers over the age of 50 are undecided about how they will access their pension savings in the run-up to retirement.
Many scheme members can access their pension from the age of 55. But the opportunity also requires several financial questions to be addressed, including how to take the money, understanding how much tax will be due, and how to create an income that will last through retirement.
According to the latest Retirement Report from Scottish Widows, less than half of workers (46%) say they expect to take their tax-free cash – a perk of pension scheme membership – as soon as they can.
But a far greater proportion, nearly two-thirds (64%) did so in reality. Scottish Widows said this gap reflects how priorities can change as retirement moves from a future plan to something more immediate.
Before retirement, more than a quarter (27%) of workers expect to keep most of their pension invested and take a regular income, while one-in-five anticipate buying an annuity. But the findings show that 28% of retirees actually choose an annuity, reflecting the appeal of a guaranteed income for life.
Carolyn Jones, retirement director at Scottish Widows, said: “Too many people only fully engage in their retirement planning when they approach the point of taking action. By then, valuable opportunities to plan, prepare and make informed decisions may already have been missed.”
“Targeted support, guided retirement journeys, digital advice and workplace education are all helping people navigate complex decisions. But we need to go further.”
More than a million pensioners are liable for higher rates of income tax, double the number from five years ago.
The finding came from a Freedom of Information request submitted to HMRC by former pensions minister, Steve Webb, now a partner at consultancy LCP.
Over the past five years, the income tax personal annual allowance has remained frozen at £12,570. Above this amount, basic rate income tax of 20% applies up to £50,270, when higher rate tax of 40% is levied up to £125,140. Above this, additional rate tax of 45% then applies.
When combined, the number of pensioners now paying either higher or additional rate tax has risen from 494,000 for the tax year 2021/22 to 1,092,000 in 2026/27.
The number of pensioners now subject to additional rate tax has trebled over the same period. Steve Webb said: “Many people of working age may have expected that they would be basic rate taxpayers in retirement, but few will have expected to find themselves paying 40% or more out of their pensions in tax.
“But this is now the norm for over a million pensioners. Those who are planning their retirement finances will increasingly need to allow for the fact that a significant chunk of the income they had planned to live on will be taxed at 40% or more. For some that means more pension saving will be needed today to compensate.”
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