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What Is a Net Pay Arrangement?
A net pay arrangement (sometimes called the gross tax basis) is one of two ways UK pension schemes give you tax relief on your contributions. Under this method, your employer takes your pension contribution out of your gross pay first, then works out Income Tax on what is left.
Because your taxable pay is lower, you pay less tax. That reduction in tax is your relief. Nothing is claimed back later, and you do not need to fill in a form. It happens inside the payroll run. HMRC puts it simply in its Pensions Tax Manual: if the contribution is £100, £100 comes off your pay and £100 goes into the scheme, and because it came off before tax you have effectively had full relief.
The tax relief you receive depends on the Income Tax rate that would otherwise apply to the part of your pay used for the pension contribution. A basic-rate taxpayer can effectively receive 20% relief, while a higher-rate taxpayer can receive 40%. If no Income Tax is due on that part of your income, there may be no immediate tax saving through a net pay arrangement.
Which Schemes Can Use It
Not every scheme is allowed to. Under section 191(3) Finance Act 2004 a net pay arrangement can be used where the scheme is an occupational pension scheme, you are an employee of a sponsoring employer, and every other contributing member who works for that employer is also on the same basis. Section 191(4) and (8) allows it for public service pension schemes, such as the Principal Civil Service Pension Scheme and the Local Government Pension Scheme, and for marine pilots' benefit funds.
Three consequences catch people out:
Your employer cannot mix the two methods. HMRC states it plainly: an employer cannot let one group of employees use net pay and another use relief at source. So if you are in the wrong scheme for your income level, your employer cannot fix it for you alone.
It only works while you are an employee. If a member is no longer employed by the sponsoring employer, net pay cannot be used for them. They claim through Self Assessment instead.
Third party contributions cannot go through it. If someone else pays into your pension for you, relief comes by claim, not through payroll.
Simple Example of a Net Pay Arrangement
Priya earns £30,000 in 2026/27 and pays 5% of her salary into her workplace pension.
Amount | |
|---|---|
Gross salary | £30,000 |
Pension contribution at 5% | £1,500 |
Taxable pay after the contribution | £28,500 |
Income Tax relief received at 20% | £300 |
Cost to Priya | £1,200 |
Amount in her pension | £1,500 |
The £300 tax saving is calculated as: £1,500 × 20% = £300 |
|
Priya is a basic rate taxpayer, so her £1,500 contribution reduces her tax bill by £300. She gets £1,500 in her pension for £1,200 out of her own pocket, and she did nothing to make it happen.
These figures are illustrative. Your own position depends on your specific earnings, contributions and tax code.
What Is the Low Earners Pension Anomaly?
The system works cleanly for Priya because she pays tax. It stops working when you do not.
The Personal Allowance for 2026/27 is £12,570. Income below that is not taxed. So if you earn £10,000, taking a pension contribution off your pay before tax saves you nothing, because there was no tax on that money to begin with. The contribution still leaves your pay. The relief never arrives.
Relief at source can still provide basic-rate tax relief even where you do not pay Income Tax, subject to the normal pension contribution limits. The provider claims 20% from HMRC on the gross contribution and adds it to your pot whether you are a taxpayer or not.
Two people, same pay, same contribution, different outcome. That is the anomaly. It falls hardest on part time workers, people on lower salaries, apprentices and anyone with variable hours, and because it depends entirely on which scheme an employer picked, nobody affected had a say in it.
It Is Not All Or Nothing At £12,570
Most explanations treat this as a cliff edge. It is not. Relief under a net pay arrangement only applies to the part of your contribution that sits against income you actually paid tax on.
Take someone earning £13,000 with a £1,000 contribution. Only £430 of their income was taxable, so only £430 of the contribution attracts relief:
At the 20% basic rate:
£430 × 20% = £86 tax relief
Before any top-up they pay £914(£1000-£86) for a £1,000 pension credit, while a relief at source member in the same position pays £800 with the pension provider claiming £200 in basic-rate tax relief from HMRC and adding it to the pension.
Net Pay Arrangement vs Relief at Source
This comparison is the heart of the whole issue. The two methods reach the same destination for most taxpayers and completely different destinations for low earners.
Net pay arrangement | Relief at source | |
|---|---|---|
How your contribution is deducted | From gross pay, before Income Tax is calculated | From pay that has already been taxed |
How relief is given | Automatically through payroll, at the tax rate that applies to you | Your provider claims 20% from HMRC and adds it to your pot |
If you pay no Income Tax | No relief, because there is no tax to relieve | You still receive 20% on the gross contribution |
Basic rate taxpayer | 20% relief, automatic | 20% relief, automatic |
Higher or additional rate taxpayer | Full 40% or 45% relief, automatic | 20% automatic, the rest must be claimed |
Do you need to claim anything? | Usually not | Yes, if you pay above the basic rate |
Typical schemes | Many occupational and public service schemes, including the Local Government Pension Scheme | Personal pensions, SIPPs, many auto enrolment schemes |
The Same £1,000 Contribution, Two Different Costs
Morgan earns £10,000 in 2026/27 and pays £1,000 into a workplace pension. Here is what happens during the year, depending only on which basis her scheme uses.
Net pay arrangement | Relief at source | |
|---|---|---|
Earnings | £10,000 | £10,000 |
Income Tax due | £0 | £0 |
Gross contribution | £1,000 | £1,000 |
Relief received | £0 | £200 |
Cost to Morgan | £1,000 | £800 |
Amount in the pension | £1,000 | £1,000 |
Same pension pot, £200 difference in what it cost. Another way to read the relief at source column: Morgan pays £800 and gets £1,000, a 25% uplift on the money she actually parted with.
That £200 is the gap the top-up is designed to close.
These figures are illustrative. Your own position depends on your specific earnings, contributions and tax code.
How Has the Government Fixed the Low Earners Anomaly?
The fix sits in section 193A Finance Act 2004, which took effect on 6 April 2024. It applies to qualifying contributions from the 2024/25 tax year onwards, with the first payments made during 2025/26.
The section works by comparison rather than by income level. It compares two figures:
The section 193 amount. how much tax relief you actually received through your net pay pension arrangement
The hypothetical section 192 amount. how much tax relief you would have received if the same contribution had been made under a relief at source scheme.
Where there is a difference between the two, HMRC has a duty to pay you that difference, so far as reasonably practicable, as soon as reasonably practicable after the end of the tax year in which the contribution was paid.
What the Top-Up Still Does Not Fix
Three limits remain, and they matter:
The money goes to you, not into your pension. It lands in your bank account. Unless you pay it in yourself, it never gets the investment growth a relief at source member's 20% has been earning all along.
It arrives after the tax year has ended. A relief at source member sees their 20% in the pot within weeks. You wait, and you lose a year of growth on that money every year.
It depends on you responding. HMRC identifies you, but you have to confirm your payment details before anything can be paid.
Who Is Eligible for the Net Pay Arrangement Top-Up?
In plain English, three things need to be true:
Your contributions went through a net pay arrangement and attracted relief under section 193. If your scheme uses relief at source, you already had your 20% and there is nothing to top up.
You received less relief than relief at source would have given you. This is the actual statutory test: a difference between the two amounts.
HMRC can see the contributions in the payroll data your employer submits under Real Time Information.
Here is the point most guides get wrong. Earning less than £12,570 is not the eligibility test. That figure is useful because someone earning below the Personal Allowance may receive little or no tax relief through net pay. But what really matters is whether there is a shortfall in tax relief.
Two examples of why the £12,570 line is not the answer: |
|---|
You earn £13,000 and contributed £1,000. You paid some tax and received £86 of relief, so you are not a non-taxpayer. You still received £114 less than relief at source would have given you. You earn £9,000 from a job but have £5,000 of other taxable income. Your total income is above the Personal Allowance and your net pay deduction may well have saved you tax, so your shortfall could be nil. |
If you are close to the line, do not assume either way. Your position depends on your own income and contributions for that specific tax year.
One further option that almost nobody mentions: the arrangements must include a procedure allowing you to decline the payment if you would rather not receive it.
How Much Could You Receive?
The amount is the shortfall, not a flat rate. Work it out by comparing the relief you actually got with the relief, relief at source would have given on the same contribution.
Four positions, each on a £1,000 gross contribution in 2026/27:
Your position | Relief actually received | Relief at source equivalent | Top-up due |
|---|---|---|---|
Non-taxpayer, earning £10,000 | £0 | £200 | £200 |
Taxable income of £430, earning £13,000 | £86 | £200 | £114 |
Scottish taxpayer in the 19% starter rate | £190 | £200 | £10 |
Basic rate taxpayer well above the Personal Allowance | £200 | £200 | £0 |
The last row is the important control. If you are comfortably above the Personal Allowance, net pay and relief at source give you the same thing and there is nothing to top up. That is why most employees have never heard of any of this.
Example: Low Earner Receiving an HMRC Top-Up
Danny works part time in a school kitchen and earns £11,000 in 2026/27. He is auto enrolled into the Local Government Pension Scheme, which uses a net pay arrangement. His contributions for the year come to £550.
Amount | |
|---|---|
Earnings for the year | £11,000 |
Income Tax paid | £0 |
Pension contributions through net pay | £550 |
Relief received through payroll | £0 |
Relief at source equivalent at 20% | £110 |
HMRC top-up payment | £110 |
Danny's pension pot still shows £550 for the year. The £110 arrives in his bank account after the tax year ends. If he wants his pot to match a relief at source member's, he needs to pay that £110 in himself.
These figures are illustrative. Your own position depends on your specific earnings, contributions and tax code.
The Scottish Starter Rate, And Why It Is Covered Too
A Scottish taxpayer in the 19% starter rate band, which runs from £12,571 to £16,537 for 2026/27, receive 19% tax relief through a net pay arrangement, while relief at source is normally given at 20%.
For example, on a £1,000 contribution, net pay relief may be £190, compared with £200 under relief at source. That leaves a £10 shortfall.
Because the HMRC top-up is based on the difference between the two methods, that £10 can also be covered.
When and How Will HMRC Make the Payment?
If nothing arrives and you think it should have, check that your employer reported the pension deductions correctly, and that HMRC holds current contact and bank details for you. Your Personal Tax Account on GOV.UK is the quickest way to see what HMRC has. HMRC's Pensions Policy Team can be reached on 03000 512336.
How to Check Whether Your Pension Uses Net Pay
You cannot tell from the size of the deduction. You have to look at the order of the calculation. Four practical checks, quickest first.
Your payslip: The fastest test. If Income Tax has been worked out on your pay after the pension line has come off, you are in a net pay arrangement. If tax has been worked out on your full gross pay and the pension deduction sits separately below it, you are in relief at source.
Your pension documents: The scheme booklet, annual benefit statement or joining pack will say how relief is given. Look for "net pay arrangement", "gross tax basis", "relief at source" or "net tax basis".
Ask payroll: Payroll knows, because the two methods are reported to HMRC differently. It is a one line answer.
Ask the provider: One clean question settles it: does the scheme reclaim tax relief from HMRC on my behalf? If yes, it is relief at source. If no, it is net pay.
Where That Leaves You
If your pay sits at or below the Personal Allowance and your workplace scheme runs on net pay, you have been funding more of your pension yourself than a colleague in a relief at source scheme. Since 2024/25 HMRC has had a duty to pay you the difference, and because it is calculated as a difference it reaches partial cases too, not just people who paid no tax at all.
Two small things are worth doing. Check your payslip and find out which basis your scheme uses, so you know whether net pay arrangement tax relief is working for you. And when HMRC invites you to supply payment details, do it, because that step is the whole mechanism and nothing arrives without it.
Glossary
Net pay arrangement: A method of giving pension tax relief where your contribution is deducted from gross pay before Income Tax is calculated, so relief comes at your marginal rate through payroll. Section 193 Finance Act 2004.
Relief at source: A method where you pay 80% of your gross contribution from taxed pay and your provider claims the remaining 20% from HMRC. Section 192 Finance Act 2004.
Marginal rate: The rate of Income Tax you would have paid on the next slice of your income. Zero below the Personal Allowance.
Hypothetical section 192 amount: What you would have received had your contribution gone through a relief at source scheme instead. The comparison figure used to work out your top-up.
Relevant UK earnings: The earnings your pension tax relief is measured against. Employment income and trade profits count. Property income does not.
Top-up payment: The payment HMRC must make under section 193A Finance Act 2004, equal to the difference between the relief you received under net pay and the relief at source equivalent, for contributions from 2024/25 onwards.
Sources
Pensions relief relating to net pay arrangements, HMRC policy paper and the full measure detail
Low earners anomaly: pensions relief relating to net pay arrangements, HMRC policy paper
Finance Act 2004, section 193, relief under net pay arrangements
Finance Act 2004, section 193A, net pay arrangements: disparity with relief at source
Finance Act 2004, section 192A, relief at source: additional relief
HMRC Pensions Tax Manual PTM044230, contributions: tax relief for members: methods: net pay, and PTM044240 on making a claim for relief
