When the OECD promoted Britain’s pension framework off the bottom rung of the developed world league table it was because they saw auto-enrolment as part of the state’s pension apparatus.
Put anothe way, they recognise that the DWP and Treasury can now use the auto-enrolment rules to control the flows of money into the UK pension framework. This blog explores how they planto subtly change our pension funding through the bands and limits coded and administered by payroll
There is tension betweenHMRC ( a part of the Treasury) and the DWP, over how the auto-enrolment rules are set. This is because minor adjustments in the AE contribution rates can mean major reductions in tax revenue collected. The cost of tax-relief resulting from the huge up-tick in pension savings from the “success” of auto-enrolment made one Treasury offical I spoke to refer to AE as “our pyrrhic victory”.
The DWP’s cunning plan
There is no doubt that DWP would, given half a chance, implement the proposed changes to auto-enrolment proposed in the 2017 review today. They couldn’t in 2017 because the Treasury told them they were too expensive and they’d have to wait till the middle of the next decade to get rid of the “qualifying earnings band” or QEB.
The QEB means that the first £6240 of your salary isn’t used for calculating your or your employer’s contribution and contributing against total pay would mean the taxpayer coughing up a minimum of 12.5% of the extra money going into people’s pots. Doing this all at once would mean a big hike in pension contributions and a big bill to HMRC
So the DWP have decided to ease the pain. The QEB is currently £12o pw and has been historically linked to the national insurance lower income level (NICS LEL). Next year the NICS LEL is going up to £123 but the DWP are planning to “de-couple” the QEB and keep it at £120 – this is the start of the journey to QEB Zero
Payroll’s last minute DWP meet.
Nothing on AE contributions has been announced yet. But the paryoll industry is pressing for a decision to get this embedded in its software for the next finanial year in April 2022.
It is pretty peeved to have to administer the further complexity of a seperate level of NICS LEL and QEB and answer questions about why auto-enrolment contributions have gone up (from employers and staff).
Last week payroll and DWP met to ensure that the 2022 AE rates are embedded in payroll software from next April. It does not sound a happy meeting. As often is the case, payroll are the champions of those who pay and they are worried about financial well-being as we struggle with rising interest and inflation rates.
Payroll worry about staff opting out of pensions and pensions getting staff into debt. With many payroll software companies having calendar year deadlines for hard-coded changes, this really is last minute stuff.
What will this mean to take-home?
The impact of decoupling is hideously complicated on people’s take home pay.
Disregarding 45% tax-payers, there are three rates of tax incentivisation applying to AE contributions, they are 40% for those earning £50k or more, 20% for people earning above £12.5k and below £50k and 0% for those earning between £10k and £12.5k (unless you are lucky enough to be in the right kind of pension when you get tax relief even though you don’t pay tax).
So those on low incomes will lose an extra £7.53 if they get no tax- relief , middle earners (and the lucky low earners ) will lose an extra £6 and the higher tax payers will only lose £4.50 next year – everyone will get the same £7.53 as pension contributions. All this complexity for an extra 65p per month into our pensions!
Next year’s AE earnings trigger has also not been announced but payroll experts think it will stay at £10K meaning that more people will be affected by the “net pay anomaly” as the National Minimum Wage risies by over 10% for some bands while the personal allowance is frozen at £12,570. Isn’t his is where the DWP should be focussing its thinking?
The result of all this frigging around is that low earners will be hit hardest while the high earners will feel no pain.
Why are payroll up in arms?
The payroll people I speak to are angry for four reasons
Firstly they are angry that they are going to be in the firing line for all the anger that will come next April when the national insurance changes take effect and people phone in – moaning.
Secondly they are fed up that they will have to include on every payslip all next year , the sentence
The 1.25% uplift in National Insurance Contributions funds NHS, health & social care.
Which they see as a) political, b) misleading (1.25% is really a 10% increase) and c)untrue as the funds that go to Scotland, NI and Wales can be spent on what devolved Governments choose.
Then they see the DWP as introducing unecessary complexity into an already complex series of bands and levels. What’s more it is introducing a change from an established convention and it’s not what people were or are expecting.
Finally they feel that the changes (which have yet to be announced) will arrive too late to be properly embedded into next year’s coding and it will be implemented with no public consultation.
Why are the DWP proposing this?
DWP think it is counter intuitive to raise the QEB in line with the LEL for the next few years and then scrap it when the AE review proposals are implemente
But at least the NPA compensation will be in place by 2024 and people will have got used to the NI hike which is after all 10% (not that most people will understand that, particularly given thq5 stupid payslip message).
Have the DWP talked to the HMRC? My payroll sources were annoyed that the HMRC were ‘on holiday’ at payroll’s virtual meeting last week , HMRC employs 50,000 people, that suggests that co-operation between HMRC and DWP on AE limits is limited.
My view is that the DWP and HMRC should be speaking as one and should be providing a road map to net-zero QEB so that we have a clear plan. This sneaky move is not going down well with payroll and looks to be bad-timing.
The DWP would be better advised to set out its stall properly and to do that early in the new year.