Management consultancy Towers Watson says the Government needs to raise the personal income tax allowance to almost £10,000 in 2012 if it wants to ensure minimum auto-enrolment contributions of £50 a year.
In October, an independent review of the Department for Work and Pensions’ auto-enrolment and Nest reforms recommended aligning the earnings threshold for auto-enrolment with the personal income tax allowance, which will be £7,475 for 2011/12. It also proposed aligning the bottom of the qualifying earnings band with the National Insurance Contribution primary threshold, which it said was £5,715.
But the Treasury recently confirmed a rise in the NIC threshold to around £7,225 per year, meaning contributions at this minimum earnings level would be based on the difference between the personal allowance and the NIC threshold, just £250.
As a result, Towers Watson senior consultant David Robbins says, under current plans, people at the bottom of the income scale could get pension contributions of just 2 per cent, the minimum total contribution until September 2016, of £250, or £5.
He says the Government would have to raise the personal allowance to £9,980 in 2012/13 to ensure minimum contributions of at least £50 a year. The coalition has previously indicated a personal allowance of £10,000 is “a long-term objective”.
In opposition, pensions minister Steve Webb expressed concern about the damaging impact small pension pots could have on the public perception to boost auto-enrolment and Nest.
A DWP spokeswoman says the personal tax allowance and NIC thresholds are uprated every year through an order, so the Government cannot say what level they will reach in 2012.