An estimated 1.4m people will benefit from Chancellor Rishi Sunak’s decision to fix the net-pay anomaly on pensions, a move broadly welcomed by industry experts.

The fix should benefit pension savers in net pay schemes by on average £53 a year but will not happen until 2025-26.

The net pay anomaly means that non-taxpayers do not currently receive pension tax relief on their contributions. To fix this the government plans to pay these pension savers a top up but only from 2025.

Former Pensions Minister Baroness Ros Altmann said was “delighted” to see the Chancellor’s Budget plan to fix “flawed pension tax relief rules” for the lowest earners.

She said more than a million low-earning women are currently paying 25% extra for their pension due to a tax administration anomaly in Net Pay schemes which means they miss out on tax relief because of the type of pension scheme they are enrolled in.

She said: “I welcome the Chancellor’s announcement to address the Net Pay pension problem, which has reduced take-home pay for the lowest earners in the country.  

“These workers lose out all the time, if their employer has chosen the ‘wrong’ type of pension scheme for them.  They have no say in this choice and are usually oblivious to what has been happening.  Therefore, I am delighted that the Treasury will act to remedy the situation.”

The Net Pay Action Group submitted proposals to fix the problem which involve changes to HMRC systems that will give the tax relief to each worker who has not received it.  

Steven Cameron, pensions director at Aegon said: “We’re delighted to see the Government allowing in its Budget spending figures for a resolution to the ‘net pay’ anomaly that has led to the lowest earners in ‘net pay’ schemes losing out on tax relief on their pension contributions.  This has been a long standing injustice and it’s great that the Government is delivering on a long standing commitment to sort this out. It’s estimated to benefit 1.2 million individuals by an average of £53 a year. 

“The ‘net pay’ anomaly means non-taxpayers in pension schemes which have opted to administer tax relief on what’s called a ‘net pay’ basis have lost out compared to those schemes operating the alternative ‘relief at source’ approach. HMRC grants non-taxpayers in ‘relief at source’ schemes basic rate tax relief but their counterparts saving in net pay schemes currently receive nothing, which means they are effectively losing out. This is a true ‘levelling up’ measure although some will be disappointed that it won’t come into effect until 2025-26.”

Jon Greer, head of retirement policy at Quilter: “After much posturing, the government has finally committed to levelling up the inherent inequality for low earners in pension net pay schemes versus relief at source schemes. 

“The Conservative party manifesto recognised the problem and pledged to solve the issue in November 2019. By the time it is eventually fixed in 2024, almost £335m will have been lost in pension funds by 1.2m lower earners, three quarters of whom are women."