The decision to freeze the auto-enrolment threshold while increasing the personal allowance leaves hundreds of thousands of low earners vulnerable, according to industry figures.
The Department for Work and Pensions has today said the threshold to qualify for automatic enrolment to a workplace pension is set to be frozen at £10,000.
The DWP also announced its intention to raise the threshold of the personal allowance for income tax.
Currently the threshold for auto-enrolment is £10,000 and the personal allowance for income tax is at £11,850. For the 2019/20, while the earning trigger stays the same, limit for personal allowance for income tax will rise £12,500.
The auto-enrolment earning trigger treshold has been set on £10,000 in 2014/2015, and has stayed the same since then. the personal allowance for income tax was then £10,600. While the auto-enrolement earning trigger treshold got frozen, treshold for personal allowance has been rising each year to current £11,850.
The widening gap will mean more lower earners, who fall in between the two figures, risk missing out on a desired tax relief.
According to the HMRC estimates, around 1.22 million workers may miss out on tax relief as a result, depending on what pension schemes their employer might use.
While the ‘relief at source’ system delivers tax relief to non taxpayers, schemes which use the ‘net pay arrangement’ system generally do not.
The decision sparked criticism among industry figures. They are warning the policy will most negatively impact lower earners.
Steve Webb, director of policy at asset manager Royal London, warns the decision to freeze the limit will leave hundreds of thousands more workers afraid whether or not they qualify for pension tax relief.
Webb says: “The gap between the point at which people are enrolled into a pension and the point at which they start paying tax will become a chasm in 2019.”
He says: “Low paid tax relief lottery set to get worse for hundreds of thousands of workers in 2019 as pension enrollment threshold frozen again.”
Webb says: “This means hundreds of thousands more workers will find that whether or not they get tax relief will depend on the lottery of what pension arrangement their employer has chosen for them.
“Government cannot keep kicking the can down the road on this issue. It now needs to be resolved as a matter of urgency.”
Similarly AJ Bell senior analyst Tom Selby predicts negative impacts from the decision.
Selby says: “The ‘net pay’ auto-enrolment problem looks set to get worse before it gets better as the gap between the point at which members pay income tax and the earnings level at which they get automatically enrolled widens from April next year.
“Over a million people in net pay schemes are already thought to have been affected by this anomaly, which robs them of the valuable tax relief they are entitled to when saving in a pension. It is particularly cruel that this flaw in the system affects the lowest earners.
“The DWP has now passed the buck to HMRC, hoping that the shift to becoming ‘one of the most digitally advanced tax administrations in the world’ will provide a ready-made solution. But until that happens this pension tax injustice will continue.”