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What do the pension auto-enrolment changes mean for your take home pay?

Paloma Kubiak
Written By:
Paloma Kubiak

Younger workers will be eligible for auto-enrolment while a minimum earnings threshold has been axed as part of big changes to pensions. But what does this all mean for your monthly pay cheque?

It’s been years in the making (since 2017 to be precise) but pension auto-enrolment is set for a big revamp since the flagship scheme was introduced in 2012 to get more people saving for retirement.

For the last 11 years, those classed as ‘workers’ aged between 22 and state pension age (currently 67) have been eligible for pension auto-enrolment.

But for employers to automatically enrol you into a workplace pension scheme, you also need to earn at least £10,000 a year from a single job, with this threshold known as the ‘earnings trigger’.

But there’s also a lower earnings limit for contributions set at £6,240, with workers earning up to this amount entitled to join a pension scheme. However, the employer isn’t obliged to contribute to your pension.

For those earning between £6,240 and £10,000 – known as the pensionable income – they can also opt-in to auto-enrolment.

Once enrolled, the current system means that contributions are based on your total earnings between £6,240 (the lower limit) and £50,270 (the upper limit). The total minimum contribution is 8% of these earnings, with you paying 5% and your employer paying 3%. You’ll also earn tax relief from the government.

However, this week, a Private Members Bill outlining auto-enrolment changes passed its third reading in the House of Lords, with the Pensions (Extension of Automatic Enrolment) Act 2023 receiving Royal Assent which means it is now expected to become law, though a date has yet to be confirmed.

Younger workers and lower earners to benefit

Following the implementation, younger workers and those with lower earnings will come under the scope of pension auto-enrolment.

The age of eligibility will fall from 22 to 18 while the £6,240 lower earnings limit for contributions will be scrapped so the first pound of earnings up to the £50,270 limit will qualify for employer contributions and tax relief.

Calculations from Aegon revealed by removing the lower earnings limit, employees will see £499.20 extra in their annual pension contributions (8% of £6,240), of which 3% (£187) is from the employer and 5% is from the employee, including tax relief (£312).

What do the pension changes mean for your take-home pay?

That all sounds great, but with the ongoing cost-of-living crisis, households may worry about channelling more cash into their pensions rather than having disposable cash for everyday essentials.

Steven Cameron, pensions director at Aegon, said: “Although great news for all savers, the changes are particularly beneficial to young workers, allowing them to save earlier and on a greater proportion of their earnings.

“More generally, anyone earning above the £10,000 trigger will continue to be auto-enrolled. Those earning below that are not currently and still won’t be in future.

“However, for anyone earning over £10,000, the removal of the lower earnings limit means that the extra contribution paid into their pot is 8% of £6,240, which equates to £499.20 per year.

“Of this extra contribution, the individual will be responsible for paying £312, with the employer making up the rest.

“Individuals also get income tax relief so the reduction in take home pay is 80% of this for a basic rate taxpayer and 60% of it for a higher rate taxpayer. In other words, someone paying basic rate tax will see their monthly take home pay reduce by just over £20.80 and a higher rate taxpayer by £15.60.”

Meanwhile, separate calculations by investment platform AJ Bell revealed that the pension auto-enrolment changes 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.