“Pension contributions triple in April!” – is that what you’ll tell your staff?

keep calm and auto-enrol

A lot of small employers we talk to are keen to work out “what happens next” with auto-enrolment. Understandably they want to model the cash-flow implications for their businesses and evolve a communication program as part of the reward strategy

What happens next for most employers is an increase in minimum pension contributions from 1 to 2% from April 2018 and from 2 to 3% a year later.

Contributions for most of the estimated 9m new employees “in” workplace pensions will jump in from 1 to 3% in 2018 and from 3 to 5% in 2019.

But it’s not quite as simple as that! You need to understand how this will work out in practice and that depends!

It depends on the type of workplace pension scheme you use

the employee may not actually see the full impact of the contribution as a payroll deduction. If the workplace pension operates under the “relief at source” or RAS rules, the employee deduction is 20% less than the amount received (the rest is clawed back from HMRC by the provider). If the scheme operates under “net pay”, then tax-relief is granted according to the employee’s tax band.

TIP 1; So before you start talking to your staff about the impact of the pension contribution increase in 2018, you had better understand what the taxation basis of your pension scheme is.

If you have staff who are in the workplace pension scheme but below the nil-rate band for tax, you will not get tax relief on your contribution. But if you are a nil-rate tax-payer and in a relief at source scheme, you will get the equivalent of tax-relief (which the Government calls “an incentive”).

While the financial impact of the incentive is negligible on 1% of earnings, it is progressively more important as contributions treble and then increase fivefold.

The higher rate tax-payer (HRT) has also a different tax-treatment depending on whether he or she is in a net-pay or RAS scheme. If in a net-pay scheme, tax relief will be given in full as a matter of course, but in a RAS scheme, the HRT is responsible for claiming the top slice of tax back through self-assessment or through a pay-coding adjustment. This is fiddly and is why a lot of old-fashioned schemes operate on a net pay basis.

TIP 2; different messages are needed for staff in net-pay and RAS schemes.

If you find you have a number of staff in a net-pay scheme who are getting no tax-relief, you should seriously consider whether such a scheme is right for your low earners. The opposite may be true if your workforce are generally higher rate tax-payers.

 

It depends on your staff’s capacity to pay more

Whatever messaging you put out to staff about the impending increases in pension contributions has to be sensitive to the auto-enrolment regulations. Strict penalties apply to employers who are seen to be frightening staff out of their workplace pensions and that is precisely what you may be doing if you phrase your communications in the wrong way. Warning staff that their contributions will be “tripling in 2018” runs just such a risk!

TIP 3; be wary of scaring the horses!

 

It depends on what the net impact on your staff’s pay-packet will be.

In practice, for those staff most vulnerable to small fluctuations in take-home, the immediate impact of the changes in 2018 and 2019 will be mitigated not just by tax relief/incentives but by broader changes in payroll deductions in the months and years to come.

 

The graph bellow shows a simulation

Estimate of change in net pay at phasing

 

 

It is based on an extrapolation of taxation trends and previous indications by the Chancellor of the direction of travel for personal taxation thresholds / bands etc.

 

There are a lot of unknowns, including the tax, NI and QE banding thresholds for the next two financial years – some of which will be more certain after the Autumn Statement and once the DWP Secretary of State sets the AE thresholds for next year.

 

The chart is for members of a legal min Qualifying Earnings banded scheme, using RAS, and shows the combined impact of tax, NI and the phased increase in contributions.

 

The chart doesn’t show the National Living Wage or UK average earnings values over time, so the lines may move a bit, as and when those change.

 

What it shows is if my “finger in the air guestimate” it at all accurate, a full time worker, on below average wages, could see their net pay go down by £20 a month or less, each time the pension contribution increase comes into effect.

 

TIP 4; if you’re going to talk numbers – make sure the numbers are accurate – talk to an expert and do some modelling

 

Put like that, it is unlikely that most low earners will even notice the impact of the increased contribution.

 

Conclusions

  • Putting together a communication strategy for April 2018/19 has to take account your basis of pension taxation
  • If you’re got the wrong basis of taxation for your staff, you should look again at your pension provider and at ways to remedy the situation
  • You should take care not to scare the horses with tales of woe about pension contributions
  • You should consider talking to an expert on the net impact of auto-enrolment phasing on your net reward.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in auto-enrolment, pensions and tagged , , , , . Bookmark the permalink.

2 Responses to “Pension contributions triple in April!” – is that what you’ll tell your staff?

  1. The comm strategy should have started already Henry!

    Liked by 1 person

  2. henry tapper says:

    Let’s hope so! But we’re surveying many tens of thousands employers at the moment to find out just how many are aware of the contribution hikes

    Liked by 1 person

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