Increase in auto enrolment minimum contributions to be cushioned by tax changes

From this weekend, savers will be putting away more in their pension pots as part of an increase in auto enrolment minimum contributions from 5% of qualifying earnings to 8%. This means employees will be saving 5% of their income, up from 3%, while their employer will now be contributing 3%, up from 2%.

While this will reduce take home pay by £302 for those earning £25,000, more than half of that (£159) will be offset by a range of tax changes coming into effect from 6 April.

  • National Insurance – the starting point will rise from £8,424 per year to £8,632 which will put another £25 per year into pay packets.
  • Income Tax Personal Allowance – this will jump from £11,850 per year to £12,500 which will put another £130 per year into pay packets.
  • Qualifying earnings lower limit – the starting point for pension contributions will increase from £6,032 per year to £6,136 which will put another £4 per year into pay packets = £159.

This means almost 53% of the extra pension contributions will be paid for by other tax changes coming into force by the government.

Meanwhile those on the National Living Wage – a full-time salary of £17,000 – will receive a boost in their next pay packet due to an increase in the minimum wage this week.

The rise for workers aged 25 and over from £7.83 an hour to £8.21 will see them receive an extra £537 a year. Together with the tax changes they will pocket an additional £696 a year while their extra pensions contributions will reduce their annual take home pay by only £175.

Adrian Boulding, Director of Policy at NOW: Pensions, comments: “Thanks to these tax changes, when people look at the bottom right hand side of their pay slip in April, they are much less likely to be worried by the increase to their pension contributions.

“By cushioning the impact, hopefully people will continue to save and resist the siren call of spending. Putting away a little bit more each month will, together with the increased employer contribution, make a big difference to savers’ future retirement prospects.”

More information

Samantha Gould – NOW: Pensions
Instinctif Partners
Fenella Cuthbert – Cicero/AMO
Tel: 0207 947 5327