Pension contributions to rise next month: what you need to know
Auto-enrolment was first introduced in 2012, making it compulsory for employers to enrol eligible staff into a pension scheme. It was phased in over a six-year period, starting with the largest employers trickling down to the smallest and newest.
To date, around nine million people are saving into a workplace pension as part of the auto-enrolment policy.
Currently, the minimum pension contribution rate is 1% from the employee and 1% from the employer, giving a 2% total contribution.
But from 6 April, the contributions will rise to 5%, made up of 3% from the employee and 2% from the employer.
While some will be nervous about seeing their pension contributions triple from the new tax year, there are a number of parts to the auto-enrolment policy, which mean you may not see a straightforward 2% drop in your salary.
Firstly, to be eligible, you need to earn at least £10,000 a year from a single job.
Secondly, you need to have ‘Qualifying Earnings’ of £5,876 for the 2017/18 tax year and £6,032 for the 2018/19 tax year.
Third, your contributions gain tax relief at your normal rate – 20% for basic rate taxpayers and 40% for higher rate taxpayers (this group needs to claim the extra 20% as part of the self-assessment tax return process).
This means that currently, the total 2% contribution rate (for a basic rate taxpayer) is made up of the following:
- Employee: 0.8%
- Tax relief: 0.2%
- Employer: 1%
When the Auto-enrolment contribution increases to 5% of a band of earnings in April (2018/19), it’s broken down as follows:
- Employee: 2.4%
- Tax relief: 0.6%
- Employer: 2%
All in all, someone earning an average annual salary of £28,600 will see the following changes, according to Aegon’s calculations:
* Salary offset (Qualifying Earnings) of £5,876 in 2017/18 and £6,032 in 2018/19.
Aegon further states that by saving £100 in a pension pot through a workplace pension scheme, it only requires an employee contribution of less than half that amount. Every £48 saved for a basic rate taxpayer is boosted by an additional £52 from their employer and the government. The boost for higher rate taxpayers is even greater.
As such, Aegon calculates that in April, workers are set to receive a £5bn pay rise bonanza as part of the contribution rises.
Opt out rates
According to the government’s auto-enrolment review, the current ‘opt out’ rate is less than 10%, but there are concerns this may rise as people notice a reduction in their take home pay.
But with contribution rates set to rise this year, choosing to opt out will effectively mean unclaimed pay rises for two million workers, according to Aegon. It added that sticking with workplace saving remains the best option for their long-term interests.
Kate Smith, head of pensions at Aegon, said: “Auto-enrolment brought pension saving for the first time to millions of people in the UK since it was launched in 2012. As the contribution rate increases, it’s important the value of long-term saving and free money workers get in return for their contribution isn’t overlooked. Even the highest interest savings accounts on the high street can’t beat workplace saving.
“Extra employer contributions into a workplace pension is like a pay rise, and it’s unlikely anyone would turn that down. We hope people recognise the need to make personal savings for retirement and see that a workplace pension is the best way to put their money to work and save for retirement.”