AE tweak adds to payroll’s April woes

Payroll software developers and payroll managers will be facing a tough eight weeks leading up to the April payroll run.

Yesterday (February 8th’s) belated announcement from the DWP of the new Auto-Enrolment thresholds (infact the old thresholds but with a little tweak) will mean some last minute coding and a lot more explaining both to employers and to staff.

What do the new auto-enrolment thresholds mean to people’s cash flows?

The substantive change in policy within the new thresholds and limits is that the link between the lower earnings limit for national insurance and the lower earnings threshold for auto-enrolment has been broken, meaning employers and staff will start paying pension contributions on a slightly wider band of earnings. This is justified as nudging people along the way to the abolition of the lower earnings threshold which the Government has says it’s intending to do since its AE review in 2017.

In practice it is a minor tweak and nothing like the abolition of the lower income threshold that some AE providers (and one private member’s bill) had called for. This was not the time for radical changes that would have radically impacted people’s take homes and their total reward (the employer’s consideration).

But the little tweak of delinking the LEL and the LET looks more trouble to explain and code, than it’s worth. It’s the kind of nudge that falls into the “tinkering” category.

Impact of freezing the AE  Lower Income Threshold and delinking it form the NI Lower Earnings Limit

The one innovation in the announcement  will mean that employers and staff will be hit by a further change which will need to be explained. The financial cost of this change is minimal to employers

But it’s rather more for staff who pay 5% rather than the promised 4%and a very high proportion of those paying the increase will not be getting tax-relief until 2025. The fiscal impact of freezing the LET to HMRC will be shamefully low as can be seen in the impact assessments at the back of the review, Although contributions will be projected to be £26m higher than last year, the anticipated payment of tax relief will actually be £1m lower.

Impact of freezing the AE  Upper Income Threshold

But the small hit to the exchequer of the minimal tax relief paid out on the freezing of the lower earnings limited, becomes a net win, resulting from  not increasing the upper earnings threshold. This will mean that no-one will have to pay earnings above £50,270, where tax relief is granted at 40%. So to HMRC, this is a small net win against any forecast that upgraded the upper earnings limit by earnings inflation.

Impact of freezing the AE  Earnings Trigger at £10,000

While the Employee’s personal allowance has remained unchanged from 2021/22 (effectively a tax-rise) , the earnings trigger for auto-enrolment has also been frozen at £10,000, so the numbers caught by the net pay anomaly remain the same but the impact of the net pay anomaly increases.

The Government is boasting that this freeze will bring 17,000 new savers into auto-enrolment in line with wage growth, how many will be overpaying their contributions by 25%?

The politicisation of payroll

The mood in the payroll camp is not good and it won’t be made any better by having to code and explain auto-enrolment tweaks announced this late in the day. The 2021 changes were announced on Jan 20th but these were announced three weeks later , leaving precious little time to code and prepare communications. There has been a radio silence from the DWP since these ideas were mooted at the back end of 2021 and payroll have had a lot of idle hands on standby in the meantime.

But what is really annoying payroll is that they will be having to explain the Government’s  freezing of student loan thresholds, income tax thresholds and the NICs hike (the latter using a financial calculation that isn’t mathematically correct).

Payroll is being asked to communicate the NI hike as a 1.25% increase. Let’s be clear a 1.25% increase in national insurance contributions translates into around a 10% increase in national insurance deductions for most people.

Why is  payroll being asked to put a political message on payslips through 2022/23 that’s not even mathematically correct? And why is nothing being made of the fact that employers are having to foot the rest of the bill, making wage restraint not a “nice to have” but a financial necessity – for most employers?

Austerity is back and payroll will have to spin bad news , the Government way.  Payroll is being  politicised and this is a bad way to treat those who do the heavy lifting for HMRC and DWP.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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