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Pay rise for workers despite pension contribution hike

Joanna Faith
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Joanna Faith

The number of people saving into a pension has grown rapidly, thanks to the government’s auto-enrolment scheme.

Since 2012, 10 million people have been automatically enrolled into a workplace pension, according to figures published this month by The Pensions Regulator.

But with minimum employee contribution levels rising in April from 3% to 5%, there are concerns that large numbers of workers could opt out of saving into a pension on the back of fears their take-home pay will take a hit.

For a worker with a £15,000 salary, annual take-home pay will be around £49 lower as a result of the change to auto-enrolment, according to research carried out by Hargreaves Lansdown for the BBC. Meanwhile, take-home pay will be £253 lower for someone who earns £30,000.

Tom McPhail, head of policy at Hargreaves Lansdown, said: “This is quite a significant increase relative to what they’ve been paying to date.

“This is going to affect up to 10 million people who’ve been auto-enrolled in the past few years, so the potential impact of this change is quite substantial.”

Minimal impact

However, analysis by insurer Royal London suggests the impact on pension scheme membership will be “minimal”.

It said increased contributions will be partly or fully offset for most people by pay rises and a more generous income tax system.

April 2019 will see an above-inflation increase in the personal allowance – the amount of income you don’t have to pay tax on – which is rising from £11,850 to £12,500.

The national minimum wage is also increasing from £7.83 to £8.21.

Royal London said these factors, together with annual pay rises, will cushion the impact of contribution increases and will in fact leave many workers with a post-tax pay rise in April.

The firm estimates that if a typical worker earning £20,000 a year in 2018/19 received a pay rise in line with average earnings and then paid 5% of their pay into a pension rather than 3%, it would result in their take-home pay increasing by £244 a year.

Although this is below the rate of inflation, the fact that pay is going up, combined with the power of inertia, is likely to mean that few people will pull out of pension saving, Royal London said.

The table below outlines the various factors at work…

2017/18 2018/19
Gross pay £20,000 £20,640
Minus income tax -£1630 -£1628
Minus National Insurance -£1389 -£1441
Minus pension -£480 -£826
Net Pay £16,501 £16,745

Royal London added that the first increase in auto-enrolment contributions last April – from 2% to 5% – did not result in large numbers of people abandoning saving into their pension.

Steve Webb, director of policy at Royal London, said: “The figures suggest good reason to be optimistic about the impact of the next step-up in contributions. A very timely increase in the tax-free personal allowance, plus a large rise in the national living wage will all help to boost paypackets in April.

“For a typical worker who gets an average pay rise, we find that their take-home pay will still go up in April, even allowing for the increased pension contributions. The bigger challenge is likely to be getting those 8% total contributions up to more realistic levels in future.”

What is happening to pension contributions in April?

From 1 April 2019, mandatory minimum contributions will increase from 5% to 8%, with employees contributing at least 5% and employers paying in at least 3%.

Your employer must automatically enrol you into a workplace pension if you’re aged between 22 and state pension age and earn at least £10,000 a year.