Currently, to be eligible for auto-enrolment, workers aged between 22 and state pension age need to earn at least £10,000 per year from a single job (the earnings trigger).

But there’s another limit which employers need to be mindful of – the lower earnings limit for contributions. Someone earning £6,240 or under is entitled to join a pension scheme but the employer does not have to contribute.

For employees earning between £6,240 and £10,000 (the pensionable income), they’re entitled to opt-in to the auto-enrolment scheme and the employer must contribute (3% from the employer and 5% from the employee).

But as part of big changes to pension auto-enrolment, the eligible age will be lowered to 18 to allow younger employees to start saving sooner.

The £6,240 lower earnings limit for contributions will also be scrapped meaning that the first pound of earnings will qualify for a matched employer contribution and tax relief, rather than a band above this amount.

Scrapping the lower earnings band means a £500 pension boost for each person automatically enrolled – and £187 of this from the employer – according to calculations by AJ Bell.

Further, it could add £120,000 to a pension pot for an 18-year old over their lifetime, while being able to save into a pension pot for an additional four years could also boost retirement funds by over £45,000.

Overall, these measures are expected to increase total pension contributions by £2bn per year in 2022/23 terms, or by £45bn over 30 years, AJ Bell added.

A Private Members Bill outlining the changes passed its third reading in the House of Lords today and received Royal Assent which means it is now expected to become law. It comes after proposals to expand auto-enrolment were first broached in 2017, and 11 years after the dawn of auto-enrolment.

‘A long time coming’

Rachel Vahey, head of policy development at AJ Bell, said: “These automatic enrolment changes have been a long time coming, but this week marks a significant step on the road to improving outcomes for millions of pension savers.

“Back in 2017, the government promised to make these fundamental changes to lower the age limit and count from the first pound of earnings. Now is the time to make good on this promise by extending automatic enrolment to help people save more from an earlier age.”

The changes have been welcomed by those in the pensions industry, although questions have been raised over when they will be implemented.

Kate Smith, head of pensions at Aegon, said: “The next step is to implement the changes, and the expectation is that the government will consult on an implementation plan imminently.

“We believe this should be carried out over two to three years starting no later than April 2025 on a phased basis so that employers and employees can get used to the increased contributions. Otherwise, someone earning £12,480 would see their contributions double overnight.”

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, added: “The aim following 2017’s Auto-Enrolment Review was to introduce these changes in the mid-2020s but as time ticked by the likelihood of it happening looked increasingly remote.

“This was understandable given the terrible impact the cost-of-living crisis was having on people’s finances – it would have been incredibly difficult to introduce such measures during such dark times. However, with signs that inflation is starting to ease back the time has come to get a timetable in place and today’s events bring us one step closer. According to Viscount Younger of Leckie we could see a consultation on how to implement these changes later this year.”