The government has set out plans to address the net-pay anomaly with a 20% top-up to contributions from April 2024.
As part of the Autumn Budget today, the Treasury said it would introduce a system to make top-up payments to low-earning individuals in a net-pay arrangement.
Currently, savers whose earnings fall below the personal tax threshold, and are members of net-pay schemes, lose out on 20% tax relief which is automatically applied to savers in relief-at-source schemes.
The majority of master trusts use this structure, which has previously been described as a "hidden scandal".
The government said its plan would "help to better align outcomes with equivalent savers" in relief-at-source schemes, benefiting around 1.2 million people by an average of £53 per year. Around 75% of those affected are women, the government estimated.
Payments will be made at the end of the relevant tax year, meaning the first contributions will be received in the 2025/26 tax year.
The confirmation came alongside a response to a call for evidence into pensions tax relief administration, which had opened to responses in July 2020.
The document proposed a number of solutions to the problem, including mandating the use of relief-at-source or introducing a standalone charge for such schemes.
The government said it would invest around £71m in modernising the administration of tax relief to aid this measure, as well as address the public sector scheme McCloud remedy.
The issue will be addressed via HM Revenue & Customs' PAYE reconciliation process, involving "significant IT system changes" ahead of the 2024 start date.
It also recognised that the differing basic rate of tax in Scotland - at 19% compared to 20% in England, Wales and Northern Ireland - added an additional complexity, but said was "open to discussing the implications of this issue" with the Scottish government.
The government said it plans to publish draft legislation in 2022, with this then being legislated for in a later finance bill.
Barnett Waddingham self-invested pensions technical specialist James Jones-Tinsley welcomed the move: "At last - the government has seen fit to meet its 2019 manifesto commitment to resolve the pension tax relief loophole. Hidden in the little red book is the introduction of a system to make top-up payments directly to low-earning individuals saving in pension schemes using a net pay arrangement from 2024-25 onwards. This may feel like small print, but it will in fact directly support the 1.5 million low-paid workers, mostly women, harmed by the tax relief discrepancy between ‘relief-at-source' and ‘net-pay' workplace pension schemes, putting more money into the retirement pots of the people who need it most.
"The fact Sunak did not see fit to include this in his speech betrays a wider issue though - the government consistently fails to adequately tackle the topic of pensions. Whether this is because it is too complex, too unpalatable, or too politically divisive is unclear. However - without real reform of the money purchase annual allowance, tapered annual allowance, and pension death benefits tax regime, neither the UK's retirement dilemma or Treasury's fiscal debt is going to be resolved."
