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Govt tax cuts create ‘severe unintended consequences’ for auto-enrolment

The Government is facing growing pressure to revisit auto-enrolment earnings limits amid concern that large swathes of society will be excluded from the reforms.

Speaking at a Money Marketing Wired event in London last week, the head of an influential pensions think-tank said politicians’ promises to cut taxes could have “severe unintended consequences” for the success of auto-enrolment.


Pensions Policy Institute director Chris Curry (pictured) said plans to further increase the income tax threshold risks taking millions of people out of saving for a pension through auto-enrolment.

This is because the auto-enrolment earnings trigger is currently linked to the income tax threshold.

Curry 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.

“That group between £6,000 and £10,000, where it is more affordable, where you’re seeing more part-time workers, where on a household -basis they may not be short of money to pay in, you might want to think about whether they should be or not.

“I don’t think it’s a matter of yes, they should be in or no they shouldn’t but it’s interesting that although 4.4 million people have been auto-enrolled since 2012, 4.7 million people from the same employers haven’t qualified for auto-enrolment over the same period. I’m not sure that was intended.”

Other panellists at the event agreed the limits of auto-enrolment need to be reassessed.

Investment Management Association public policy director Jonathan Lipkin said although the original plans for auto-enrolment did not want very low earners included, “since the Pension Commission reported there have been quite a number of changes to the threshold and it’s now not quite as clear”.

CBI head of public services Jim Bligh said extending auto-enrolment to lower-paid workers was a “challenging” issue but the scope of auto-enrolment should only be looked at in 2018 after the programme has been fully rolled out.

The Labour party has previously called for the trigger for auto-enrolment to be lowered to £5,773, the National Insurance lower earnings limit. 

However, pensions minister Steve Webb is adamant that people on that level of salary will receive a good enough income replacement from the state pension.

A DWP spokesperson confirmed there is no “mechanical link” between income tax personal allowances and the auto-enrolment trigger but simply an obligation for the department to review the threshold every year.


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