Potential Changes to Automatic Enrolment Pensions.

The DWP has been considering how to extend auto enrolment to a wider range of workers. The introduction of regulations could facilitate changes to expand the criteria of eligibility for auto enrolment.

Auto-enrolment into a workplace pension is a government initiative designed to encourage individuals to build up savings for retirement.

The current key criteria of auto-enrolment pensions:

Employees aged between 22 years old and state pension age and earning above a certain minimum amount are eligible for auto enrolment. Employers are obliged to enrol employees into a workplace pension scheme if they meet the following criteria:

• Work in the UK (including seafarers residing in the UK)
• Are not already in a suitable workplace pension scheme.
• Are aged between 22 years and State Pension age.
• Earn more than £10,000 a year for the tax year 2023/24.

Employees who meet these auto enrolment conditions, will also be covered if they:

• Are on a short-term contract.
• Are paid by an agency or
• Are on maternity, adoption, or carer’s leave.

If an employee earns less than £10,000, but above £6,240 (for the tax year 2023/24), an employer doesn’t have to automatically enrol them into a scheme. However, the employee is entitled to ask to join the scheme. An employer is unable to refuse the request and must make contributions.

Employees, employers, and the government in the form of tax relief, contribute minimum amounts into the scheme.

The minimum contribution is usually 3% by the employer and 5% by the employee. However due to the 20% tax relief applied by the government the employee contributes 4%

The minimum contribution applies to earnings over £6,240 up to a limit of £50,270 (in the tax year 2023/24). This slice of earnings is known as ‘qualifying earnings’. Qualifying earnings are all an employee’s earnings between a lower and upper limit set by the government and reviewed each year.

However, over many years the DWP has been considering how to extend auto enrolment to a wider range of workers and to encourage saving through a workplace pension.

Changes have received Royal Assent which would introduce the possibility of the introduction of regulations:

1. to reduce the lower age limit for auto-enrolment. The age that employees can be enrolled will be reduced from 22 years to 18 years.
2. to remove the Lower Earnings Limit for qualifying earnings. This would mean auto-enrolment contributions are payable from the first £1 in earnings, so no longer offset by the LEL (lower Earnings Limit) of £6,240 per annum.

The effect of the introduction of these regulations

Changing the definition of ‘qualifying earnings’ will benefit basic rate taxpayers who will see employer contributions paid against their gross earnings and no longer have £6,240 offset.
Higher rate taxpayers are still caught by the upper earnings limit of £50,270. Therefore, their contributions will be calculated at the maximum amount of £50,270 for the year.

How these regulations may affect employers and employees.

If and when these changes are in place employers will have to budget for higher monthly pension payments, as workers from 18 years may be eligible for auto-enrolment and qualifying earnings for all eligible employees will range from £1-£50,270 pa.

There may be additional administration for employers in communicating changes to employees and keeping track of re-enrolment dates.

Employees on ‘qualifying earnings’ pensions will have to contribute more each month from their net take home pay as they will no longer have the £6,240 pa offset.

A date for the introduction of the regulations has not yet been announced.

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