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BLOG: The one hand giveth…

Paloma Kubiak
Written By:
Paloma Kubiak

…and the other hand taketh away.”’ Those employees concurrently contributing towards a workplace pension and repaying student loans will feel the effects of this maxim in April’s pay packet.

Workplace pension contributions

The auto-enrolment contribution rates for both employees and employers rose in the new April 2018/19 tax year.

The minimum contribution rate has increased from 2% (1% each from the worker and employer), to 5%, made up of 3% from the employee and 2% from the employer.

Industry analysis and forecasts varied from those who feared we’ll see swathes of workers opting out of the higher contribution rates for affordability reasons, to others who remained optimistic that employees would continue to save prudently for their retirement.

According to the government’s auto-enrolment review, the current ‘opt out’ rate is less than 10%, and when you factor in pension tax relief (at your marginal rate), every £48 saved by a basic rate taxpayer is boosted by an additional £52 from an employer and the government, according to calculations by Aegon.

Further, it calculates that someone earning an average annual salary of £28,600 will see their contributions rise from £182 a year (with £454 in total in pension pots after employer contributions and tax relief) to £542 a year (£1,128 in total).

Based on the average salary, this means a worker is essentially seeing their pension contributions rise by £360 a year which means monthly wage packets will be reduced by £30 a month.

Student loan repayments

On the plus side, take home pay for those repaying student loans will increase from this month.

A threshold change means those who started a university course from 1998 onwards will repay less each month (see our Student loans guide for more information on the changes).

As such, the Student Loans Company (SLC) calculations suggest that Plan 2 members (students who took out loans on or after 1 September 2012), earning £30,000 will repay £37 per month in loan repayments following the threshold change. Under the previous threshold, these graduates would have repaid £67 per month so that means an extra £30 in your pocket each month.

Pay packet equilibrium?

While many workers may be concerned about take home pay falling as a result of the pension contribution rate rises, for millions the decrease could be offset by employee student loan repayments falling, meaning more money in monthly wages.

The exact amount will depend on your salary and what plan you come under in the student loans system (if any).

The illustrative calculations are very loose, so it’s worth checking your March 2018 payslip against the April 2018 one to see the real impact of both changes in terms of take home pay.