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Government tweaks pension auto-enrolment threshold

Written by: Paloma Kubiak
The Department for Work and Pensions (DWP), has increased an earnings threshold which relates to the minimum contributions which have to be paid under auto-enrolment rules.

In order 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. DWP has today announced this earnings trigger amount will remain unchanged.

However, employers also need to take note of a second threshold or ‘Qualifying Earnings’ figure which relates to how the minimum contributions are calculated in accordance with the auto-enrolment legislation.

For the 2020/21 tax year, the basic annual amount (Qualifying Earnings) has risen £104 to £6,240 while the higher amount remains unchanged at £50,000, DWP confirmed.

Someone earning £6,240 or under is entitled to join a pension scheme but the employer does not have to contribute. An employee earning between £6,240 and £10,000 (the pensionable income) is also entitled to opt-in to the auto-enrolment scheme and the employer must contribute (currently 3%).

Kate Smith, head of pensions at Aegon, said: “Freezing the earnings trigger at £10,000 a year means  more people will gradually be bought into auto-enrolment as people’s earnings rise. In turn, more people will benefit from their employer’s contribution helping to boost their pension savings and get them into the savings habit.

“It’s disappointing that the government is not applying the same principle to the lower limit for the qualifying earnings band. A freeze would increase the amount people would automatically save for their future. Removing the lower earnings limit altogether, as recommended by the 2017 review of automatic enrolment, would lead to higher pension savings, particularly for those on low to mid incomes.”

Auto-enrolment sums

If an employee earns an annual gross salary of £55,000 (above the higher qualifying earnings figure of £50,000), the pensionable salary for contributions is £43,760 (£50,000 – £6,240).

The minimum pension contribution under auto-enrolment is currently 3% from the employer and 5% from the employee (including 1% tax relief), meaning an 8% total contribution.

This means someone earning the average salary of £29,000 per year will have pensionable earnings of £22,760 (£29,000 minus £6,240) so they pay £1,138 into their pension and their employer contributes £682.80, with the total annual contribution at £1,820.80.

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