Guide

Net Pay Pension Arrangements and Low Earners

Published by the UK Money Calculators editorial team. Last updated for the 2026/27 tax year.

Net pay pension arrangements work well for most people. Contributions come off gross salary before tax, so you get automatic relief at your full marginal rate. But for lower earners, particularly those below the Personal Allowance, the picture changes. If you pay no income tax, there is no relief to receive. Net pay schemes can leave some workers worse off than those in relief at source schemes. The government has introduced a top-up to fix this, but it is worth understanding exactly how the problem arises.

How net pay arrangements work

In a net pay arrangement, your employer deducts your pension contribution from gross salary before calculating income tax. Earn £30,000 and contribute £2,000, and income tax is calculated on £28,000. You get tax relief automatically at whatever rate you pay: 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and so on.

Under relief at source it works differently. You pay the net amount (80% of the gross) and the provider claims the 20% top-up from HMRC directly.

The problem for low earners

The problem hits when income falls below, or close to, the Personal Allowance of £12,570. Income below that threshold is not taxed. So deducting a pension contribution from pre-tax pay does not actually save any tax. The contribution is deducted. But there is nothing to offset it.

A worker in a relief at source scheme faces the same earnings but a different outcome. Even if they pay no income tax, the provider still claims 20% from HMRC. So £800 becomes £1,000 in the pension, regardless of tax position.

Same earnings, different outcome depending on which scheme the employer uses. That is the inequality.

Worked examples

Example 1 — Earner above the Personal Allowance

Jamie earns £15,000 and contributes £1,000 to a workplace pension.

  • Net pay: Contribution deducted pre-tax. Jamie pays 20% tax on earnings above £12,570, so the contribution saves £200 in income tax. Net cost to Jamie: £800.
  • Relief at source: Jamie pays £800; provider claims £200 from HMRC. Pension receives £1,000. Net cost: £800.

Both methods cost Jamie £800 for £1,000 in the pension.

Example 2 — Earner below the Personal Allowance

Morgan earns £10,000 — below the £12,570 Personal Allowance. Morgan contributes £1,000 to a workplace pension.

  • Net pay: Contribution deducted pre-tax. Morgan pays no income tax on any earnings, so there is no tax saving. Net cost: £1,000 for £1,000 in the pension. No relief received.
  • Relief at source: Morgan pays £800; the provider claims £200 from HMRC regardless of Morgan's tax position. Pension receives £1,000. Net cost: £800 — Morgan receives relief even though no tax is owed.

The difference is stark. The net pay worker gets nothing back. The relief at source worker gets a 25% uplift.

The government top-up for net pay low earners

HMRC introduced a top-up payment for low earners in net pay schemes, effective from 2024/25. Workers who earn below the Personal Allowance can receive a top-up from HMRC equivalent to the basic rate relief they would have got under relief at source. The payment comes directly from HMRC, not from the pension provider.

There are specific eligibility conditions and rules about how the payment is made. See GOV.UK for current details and how to check whether you qualify.

Should you ask to switch schemes?

Employers typically cannot offer both scheme types to the same employee. Switching usually means changing employers or pension provider. If you are in a net pay scheme and your income is below or near the Personal Allowance, it is worth finding out whether you are affected, particularly if your hours vary or you work part-time.

If you also contribute to a personal pension or SIPP, you can choose a relief at source provider there. That gives you the 20% top-up regardless of your earnings.

Compare scheme types

See how net pay, relief at source and salary sacrifice compare for your income and contribution level.

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Frequently asked questions

Am I affected by the net pay low earner problem?

You may be affected if your gross earnings for the year are below £12,570 (the Personal Allowance for 2026/27) and your employer uses a net pay pension arrangement. This is common for part-time workers, seasonal workers and those who work reduced hours. If your income is above the Personal Allowance but you are a basic-rate taxpayer, your outcome under net pay and relief at source is generally the same.

Should I ask to switch to a relief at source scheme?

Employers generally cannot offer both types of scheme simultaneously, and switching is not usually straightforward. However, if you contribute to a personal pension or SIPP independently, choosing a relief at source provider for those contributions gives you the 20% top-up regardless of your tax position. If you think you are missing out through your employer's scheme, it is worth raising with HR or checking GOV.UK to see if you qualify for HMRC's top-up payment instead.

What did HMRC change for low earners in net pay schemes?

From the 2024/25 tax year, HMRC introduced a mechanism to top up low earners in net pay schemes so they receive relief equivalent to what they would have received in a relief at source scheme. The payment is made directly to the individual — not added to the pension. The rules around how to claim and who qualifies are set out on GOV.UK and may be updated, so always check the current guidance.

Does this affect auto-enrolment pensions?

Yes. Many auto-enrolment schemes — especially large workplace master trusts — use net pay arrangements. Whether you are affected depends on the specific scheme your employer uses. NEST, for example, uses relief at source, which means low earners in NEST automatically receive the 20% top-up. Other common workplace schemes may use net pay. Your employer or pension provider can confirm which method applies to your scheme.

What about Scottish taxpayers and net pay arrangements?

Scottish taxpayers have different income tax rates and bands. The starter rate for Scottish taxpayers is 19% on income between £12,570 and £16,537. In a net pay scheme, Scottish taxpayers receive their actual marginal rate of relief automatically — which may be 19% rather than 20%. In a relief at source scheme, the provider always claims 20% from HMRC, potentially giving Scottish starter-rate taxpayers slightly more relief than they technically owe. The calculator handles Scottish rates separately.

Official sources

Disclaimer: This guide is for general information only and does not constitute financial or tax advice. Pension tax rules are complex and individual circumstances vary. Figures shown are for England, Wales and Northern Ireland unless stated. Consult a qualified financial adviser or HMRC for personalised guidance.