The Government is considering ditching the link between the automatic enrolment earnings trigger and income tax next year.
A Department for Work and Pensions consultation published today sets out four possible options to “maintain a strong balance for the threshold” for 2015/16.
The options include:
- Freezing the earnings trigger at the current level of £10,000;
- Raising the trigger by indexation (CPI or earnings);
- Increasing the trigger to £10,500, in line with the income tax threshold;
- Using the Pensions Commission benchmark replacement rate to determine the trigger.
The DWP says: “The Government is now reviewing the current thresholds in readiness for next year and have decided that the timing is right for a further consultation. Given the number of employers who have now gone through the staging process, we hope to gain some valuable insight on the experiences of live running.
“We would also like to test whether maintaining the alignment between the earnings trigger and the income tax threshold remains right in the light of proposed increases to the threshold and suppressed earnings growth.
“If changes are made, these will come into effect on 6 April 2015. However, in order for as much of the process as possible to be automated, software providers will need advance notice of the Government’s intentions in relation to the new thresholds. We therefore propose to respond to this consultation in December, around the time of the Autumn Statement.”
Pensions minister Steve Webb says: “It is important that we continue to set the right starting point for automatic enrolment into a workplace pension.
“We must strike the right balance between simplicity for firms and making sure the right people are brought into pension saving. This is a key part of the Government’s plan to create a stronger economy and a fairer society.”
Speaking during an MM Wired debate last week, Pensions Policy Institute director Chris Curry said plans to further increase the income tax threshold risk taking millions of people out of saving for a pension through auto-enrolment.
He said: “This is one of those situations where something that seemed sensible at the time has had some very severe unintended consequences.
“Linking the level to which you qualify for auto-enrolment with the lower threshold for income tax was an eminently sensible thing to do.
“We didn’t want to create three different thresholds for income tax, National Insurance and auto-enrolment, so linking to one of them made perfect sense.”
But Curry said that if the trigger for auto-enrolment continues to follow the lower income tax personal allowance, a greater number of lower earners will miss out.
“The difficulty is that since political parties have started to increase the income tax threshold to reduce the number of people paying tax, a knock-on effect is that far fewer people are being automatically enrolled – probably two to three million people who would have been auto-enrolled earning between £5,500 to £10,500,” he said.
“And if the Conservatives are re-elected and it goes up to £12,500, that’s a massive part of the lower earnings group taken out.”