The net-pay pension trap: why low earners get zero tax relief on their workplace pension

What the net-pay trap is

UK pension tax relief works in two different mechanical ways depending on how an employer's pension scheme is set up (HMRC, Pension tax relief; MoneyHelper, Tax relief and your pension). For most workers, both methods deliver the same outcome: the government's top-up to the pension contribution is worth 20% at the basic rate (more at the higher rates), regardless of which mechanism the employer uses.

For one specific cohort of workers, the two mechanisms diverge: workers whose earnings sit between the auto-enrolment trigger of £10,000 and the personal allowance of £12,570 (HMRC, Auto-enrolment earnings trigger and qualifying earnings band 2026/27 review). For this group, a net-pay pension scheme delivers zero income tax relief. A relief-at-source scheme delivers a 20% top-up for the same contribution. Same worker, same contribution, same income, different government top-up depending only on which method the employer chose.

This is the "net-pay trap". It disproportionately affects low earners, women returning to work part-time, and stay-at-home parents claiming Child Benefit who pay a small workplace pension contribution.

How the two methods work

Net-pay method: the pension contribution is deducted from the worker's gross salary before income tax is calculated. The worker's taxable income is reduced by the contribution amount, which means less income tax is paid. The tax saving is the worker's marginal income tax rate (0%, 20%, 40%, or 45%) multiplied by the contribution. For a basic-rate taxpayer contributing £100, the net cost is £80; HMRC effectively contributes £20 via the lower tax bill.

Relief-at-source method: the pension contribution is deducted from the worker's net (post-tax) salary. The pension provider then claims 20% tax relief from HMRC and adds it to the worker's pension pot directly. A £100 employee contribution becomes £125 in the pension (the £25 is HMRC's 20% top-up on the gross-equivalent £125). Higher-rate taxpayers claim the additional 20% or 25% via self-assessment.

For a basic-rate worker earning above £12,570, the two methods deliver the same outcome: a £100 contribution costs the worker £80 in take-home pay and ends up worth £100 in the pension.

For a worker earning between £10,000 and £12,570, the divergence appears: there is no income tax to relieve (the worker is below the personal allowance and pays £0 income tax). The net-pay worker's gross salary is reduced by the contribution but the income tax bill cannot fall below £0, so no tax saving materialises. The relief-at-source worker still receives the 20% HMRC top-up because the relief is paid to the pension provider directly, not via a tax deduction.

Worked example: £11,500 earner contributing £40/month

A worker earning £11,500 per year is auto-enrolled into their employer's pension scheme. They contribute 5% of qualifying earnings (currently £1.50 of every £100 in the £6,240-£50,270 band) plus their employer's 3% contribution.

Their personal contribution at this salary works out at roughly £40 per month (£480 per year, depending on the employer's specific qualifying-earnings calculation).

Under a net-pay scheme:

• £40/month deducted from gross salary
• Worker's annual taxable income: £11,500 − £480 = £11,020
• Income tax at 20% above £12,570: £0 (below personal allowance)
• Tax saving from the £480 contribution: £0
• Worker is £480 worse off in take-home pay; pension receives £480 in contributions

Under a relief-at-source scheme:

• £40/month deducted from net salary (post-tax)
• Pension provider claims 20% tax relief from HMRC
• Worker contribution becomes £40 + 20% top-up applied at gross level = £50 going into the pension per month
• Annual: worker is £480 worse off in take-home pay; pension receives £600

The difference per year: £120 of HMRC top-up the net-pay worker does not get. Over 10 years of contributions at the same salary, the gap compounds to roughly £1,200 of missed relief before any investment growth on the missed amount.

Calculate Your Take-Home Pay → (useful for working out the marginal tax rate at different income levels; the relief gap closes entirely above £12,570.)

How to tell which scheme you are in

The pension scheme documentation provided by the employer states the method used. Common phrasing includes:

• "Net pay arrangement", "deduct from gross salary", or "salary sacrifice" → net-pay-style mechanism
• "Relief at source", "RAS", or "the provider claims 20% from HMRC" → relief-at-source mechanism

A worker can also check their pension provider's annual statement. A relief-at-source statement typically shows employee contributions broken down as the £100 gross with the 20% HMRC top-up listed as a separate line. A net-pay statement typically shows the gross deduction from salary with no separate HMRC top-up line (because the relief is mechanically embedded in the lower tax bill).

The choice of method is made by the employer when the scheme is set up, not by the individual worker. Workers cannot unilaterally switch their pension into the alternative method; they can raise the issue with their employer, ask if a relief-at-source option is available, or in some cases choose to opt out and contribute to a personal pension (which is typically relief-at-source) separately.

Policy context

The net-pay trap has been documented by HMRC and the Low Incomes Tax Reform Group for over a decade. The government acknowledged the issue in the 2023 Autumn Statement and committed to a top-up mechanism that would pay relief equivalent to 20% directly to affected workers retrospectively via HMRC's systems. The implementation has been deferred multiple times; the most recent timetable points to top-up payments being made from the 2025/26 tax year onward, with the first payments expected to be processed in 2026/27 and continuing thereafter (HMRC, Auto-enrolment earnings trigger and qualifying earnings band 2026/27 review).

Until the HMRC top-up reaches steady state, the practical position remains as described: a worker in a net-pay scheme earning below the personal allowance gets no income tax relief on their pension contribution. Workers in this situation may wish to confirm with their employer whether the scheme has switched to relief-at-source or whether the HMRC retrospective top-up applies to their contributions.

Frequently asked questions

Does the trap apply to higher earners too?

No. For workers earning above the personal allowance (£12,570 in 2026/27), both methods deliver the same outcome: the contribution attracts tax relief at the worker's marginal rate. The trap only affects the cohort earning between the £10,000 auto-enrolment trigger and the £12,570 personal allowance.

Does salary sacrifice avoid the trap?

Salary sacrifice is a separate arrangement where the worker formally agrees to a lower salary in exchange for an enhanced employer pension contribution. For workers below the personal allowance, salary sacrifice still produces no income tax relief (because there is no income tax to relieve), but it does save the worker's 8% Class 1 National Insurance contribution on the sacrificed amount. The NI saving is real but smaller than the missed income tax relief in a relief-at-source comparison.

What about the 200,000 stay-at-home parents losing State Pension?

That is a related but distinct issue. Stay-at-home parents who claim Child Benefit are entitled to National Insurance credits, which count toward their State Pension qualifying years. Some parents do not register for Child Benefit at all (because their household income is above the £80,000 High Income Child Benefit Charge threshold and they opt out of the payment), which can mean they unintentionally miss the NI credit too. The fix is to register for Child Benefit even if opting out of the payment itself (gov.uk, Child Benefit overview).

Will the HMRC top-up be paid automatically?

The HMRC top-up to address the net-pay trap is intended to be paid automatically based on PAYE data, without the worker needing to claim. The exact timing and mechanism for back-dated relief on prior tax years has not been fully published; the current public commitment is that affected workers will receive top-ups via HMRC's systems for contributions made from 2025/26 onward.

Where can I check my pension scheme's method?

The scheme documentation from the employer or pension provider states the method. The annual pension statement also makes the method visible: relief-at-source statements show the HMRC top-up as a separate line; net-pay statements do not. The pension provider's customer service can confirm if the documentation is unclear.

Further reading

• HMRC Pension tax relief: how the two methods work, eligibility and limits
• HMRC Workplace pensions overview: auto-enrolment rules, opting out, employer contributions
• HMRC Auto-enrolment 2026/27 review: the trigger and qualifying earnings band
• MoneyHelper Tax relief and your pension: consumer guidance from MaPS
• Low Incomes Tax Reform Group (LITRG): the campaigning hub on the net-pay trap and other low-income tax issues