Low paid need help with rise in auto-enrolment

04 April 2018

The Low Incomes Tax Reform Group (LITRG) is calling for more help for the low paid because of the increase in the cost of auto-enrolment.

“This should include the government both allowing those on the lowest pay to salary sacrifice and also finding a way to overcome the lack of tax relief for those in certain pension arrangements”, says LITRG.

Workers who have been enrolled automatically into a workplace pension, from 6 April 2018, may be required to increase the amount of their minimum contributions from one percent to three percent of their qualifying earnings. From 6 April 2019, their minimum contributions will increase again to five percent. In 2018/19, qualifying earnings are those over £116 per week up to an upper limit of £892 per week (£503 and £3,863 a month).

LITRG chair Anne Fairpo said:

“The increase in contribution rates makes auto enrolment a much bigger consideration for the lowest paid. The fact that many people on low incomes cannot obtain tax relief is a huge disincentive – it makes auto enrolment effectively 20 per cent more expensive for them.”

The lack of tax relief affects those who earn over the £10,000 needed to trigger auto-enrolment, but below (or not very much above) the income tax threshold (currently £11,500 and set to rise to £11,850), who are enrolled in a ‘net-pay’ pension scheme rather than a ‘relief at source’ scheme.

LITRG give an example:

Consider Marcie, who earns £225 per week. In 2018/19, she will pay contributions based on £109 (£225 less £116) each week. Over the course of the year Marcie will need to put in £170.04 to her pension if she is in a ‘net pay’ scheme, whereas she would only need to put in £136.03 if she was in a ‘relief at source’ scheme – the rest will be paid into her pension pot by the government as tax relief. From April 2019, when contribution rates increase to five percent this £34 pension ‘penalty’ for Marcie will increase to £56 (assuming all else remains the same).

If Marcie’s £225 earnings are derived from being on or near the minimum wage, then there is a double hit for her because she also cannot salary sacrifice to save 12 percent National Insurance, if such an arrangement would take her pay below the level of the applicable minimum wage rate (£7.83 per hour in 2018/19 for those aged 25 and over)

Anne Fairpo said:

"One of the concerns about allowing the lowest earners to sacrifice salary has been the risk of their pay dropping below the point at which entitlement to contributory benefits is triggered (the Lower Earnings Limit - £116 per week in 2018/19). In our view, the ‘risks’ to such employees of using salary sacrifice are largely overstated and there would be nothing to stop the government building in a safeguard to stop salary sacrifice pushing an employee's salary below the Lower Earnings Limit to ensure their contributions record remains protected.”

We would urge the government to think about allowing those on the lowest pay to salary sacrifice and also find a way to overcome the lack of tax relief.”

LITRG suggests that by using PAYE real time information data, HMRC could match pension contributions deducted via the payroll to individuals’ records and reconcile where those in a ‘net pay’ arrangement have not received tax relief but would have done so under a ‘relief at source’ scheme. The relief they have lost out on could be paid to the pension scheme in which they are enrolled.

Read the full news item from LITRG.