Net pay equalisation: A win for low-income employees

Words by: Cushon

Published on 25th September 2024

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3 min read

Here’s what you need to know.

More employees can benefit from pension tax relief

Pensions have been in the news a lot since we got a new government. Overall, they seem keen to improve employee savings, talking about value for money, pensions adequacy and various regulation changes. But it’s easy to get lost in all the noise, so let’s slow things down and take it a topic at a time, starting with net pay equalisation. 

‘Net pay equalisation’ is a bit of jargon that effectively means every employee can get tax relief on pensions now, even if they don’t pay tax. It has to do with ‘net pay arrangements’, where workplace pension contributions come out of wages before income tax. 

This change is an effort to help employees on low incomes, who earn less than £12,750. £12,750 being the personal allowance for income tax. 

How is income tax related to pension tax relief?

Tax relief on pensions is the incentive the government offers to make workplace pension contributions more rewarding. Most people get 20% tax relief, which means the government pays £20 of every £100 they save into a pension.  

But where does that £20 come from? It’s actually taken from the money they pay in income tax. So, if an employee doesn’t pay any income tax, there’s nothing to pay for the tax relief, which is why low-income employees couldn’t get it… until now!  

HMRC is taking care of it. You don't have to

If employees on low incomes don’t pay income tax but will get pension tax relief, where is that money coming from? Will employers have to foot the bill instead? Put simply, no. You don’t have to do anything. HMRC is covering it. 

At the end of the tax year, HMRC will do their usual income tax and tax relief calculations, contacting employees if they need any details. If any low-income earners are entitled to tax relief, HMRC will pay it directly into their bank account.  

This will be an automatic process with nothing for the employer to do. But if this does affect any of your employees, why not share the good news?

Workplace pension round-up 2024

In case you missed it, we hosted a webinar for our clients on 10th September to let you know about regulation changes like this one. 

NatWest Cushon specialists and trustees covered what’s new and what’s coming for UK pensions. They also discussed our evolved brand identity, investment strategy and decarbonisation journey, all of which have a direct impact on employee experience. In short, we’ve turbocharged what we do for you and your teams! 

This communication is for information purposes only and is not personal advice.