HMRC manual adds automatic top-up for low earners in net pay schemes

HMRC's net pay manual page now carries a new section on the low earners pensions payment (LEPP)GOV, which addresses the long-standing disparity between the two ways workplace pension schemes deliver tax relief.

Under a net pay arrangement, pension contributions are deducted from gross pay before tax is calculated, so the member gets full relief at their marginal rate up front. Under relief at source, by contrast, the scheme administrator claims basic-rate relief from HMRC and adds it to the pot even where the member pays no tax — which is the disparity the payment corrects. A member whose total income for the year does not exceed the personal allowance gets no effective income-tax relief on contributions made through net payGOV, while an identical saver in a relief-at-source scheme still has basic-rate relief added to the potGOV — which is the disparity the payment corrects. The LEPP is the corrective: an annual payment due to individuals who earn below or around their tax allowanceGOV, have paid into a net pay arrangement schemeGOV, and have not received tax relief on all or some of their contributionsGOV.GOV Its stated purpose is to put low earners on a similar footing whichever method their employer's scheme uses.

Section 193A applies where the individual is entitled to relief under section 193 for the contribution, is entitled to a personal allowance for the year, and has total income not exceeding that allowance; HMRC must then pay the appropriate amount — income tax at the relevant basic rate (Scottish, Welsh or rest-of-UK as applicable) on the contribution, or on the slice of it that keeps total income plus contribution within the allowance. The amount is paid as soon as reasonably practicable after the tax year and is treated as UK employment earnings for income-tax purposes apart from that calculation; the individual may decline it. Eligibility is calculated separately after the end of each tax year, starting with 2024-25GOV. That year-by-year framing matters: a member qualifies, or not, on the facts of each tax year, so a change in earnings or scheme membership from one year to the next changes the position for that year alone. There is no continuing entitlement carried forward from an earlier year.

There is nothing to apply for. Individuals do not need to claim the LEPPGOV; HMRC will contact members directly to notify them of eligibilityGOV. That no-claim design has a practical consequence for advisers: a low-earning client in a net pay scheme who has received no payment should be told to watch for HMRC contact rather than to file anything: the manual provides for HMRC to contact eligible members directly, and provides no claim routeGOV.

The manual context around the new section is otherwise unchanged. Where insufficient relief has been given through net pay because contributions exceeded the member's employment income from the sponsoring employer, or the employer could not deduct the whole contribution from that income, the member should still claim full relief — via a self-assessment return where possible, as the manual's section on making a claim describes. Non-current-employee members remain outside the net pay arrangement altogether and claim through self-assessment. The all-or-nothing scheme rule also stands: an employer cannot run net pay for one group of employees and relief at source for another within the same occupational scheme.

Legal basis: section 193A of the Finance Act 2004 (inserted by the Finance (No. 2) Act 2023), as set out in HMRC's Pensions Tax Manual page on net pay (PTM044230).