Auto-enrolment limits – what the DWP aren’t saying!

The DWP’s paper on the Earnings Trigger and Qualifying Earnings Bands(QEB) for auto-enrolment next year is very well written and gives an insight into just how much thought is going into managing the conflicting needs of employers, workers, administrators and…HMRC.

I put HMRC at the end because, though they aren’t mentioned as a driver, their presence is the elephant in the room. The recent postponement of the auto-enrolment phasing increases by 6 months was dressed up as an administrative alignment but everyone knows that the £840m saving it created in tax relief was what that was about!

The success of auto-enrolment is creating an unexpected problem. UK Plc cannot afford the extra tax relief that will be granted when we move to full throttle contributions and have enrolled another 5m+ into the system.

But let’s have a look at what the DWP has decided upon

The only threshold that changes in 2016/17 compared to 2015/16 is the QEB Upper Limit.

You can translate these annualised amounts for common Pay Reference Periods, with the help of this table provided by Cintra’s Ian Holloway (thanks Ian); thinking in terms of pay periods is important (see below)

( this doesn’t yet apply to employers in Northern Ireland who have to wait for their rate).

What this means is that more people will be enrolling below next year’s Earning’s threshold (£11,000) and more people will have the right to opt-in (earning over QEB lower limit). Because the QEB band has been stretched at the top but kept at previous levels at the bottom, more money will be paid into auto-enrolment schemes.

All this is good news for workplace pension provision except….

Here is my letter to the DWP which expresses my concerns

I found the document produced on auto-enrolment trigger levels and the band calculations a really easy read and a very good analysis. Thanks for the clear language , the right tone and the excellent explanation of the various factors that go into your decisions.

My  criticism is that you could be underestimating the numbers caught by the net pay problem. your analysis supposes that only people earning between 10,000 and 11,000 could be enrolled into a net pay scheme. In reality, anyone who earns more than 10k (pro rated) in a pay period can find themselves enrolled (unless postponed). They then have to opt-out even if their earnings fall back below their bands in subsequent pay periods.

Have you done analysis of how many people are earning below £11,000 and are accidentally in? I accept that those who voluntarily opt in are doing so at their own peril but would still point out that many of them will be doing so under the assumption they will get the “Government incentive”. 

While I don’t want to be alarmist, i suspect that the constituency of people in net pay schemes who should be in RAS is higher than your analysis supposes and that, as you suggest , employers should be asking questions about the tax relief on offer. This is particularly the case for large employers with occupational schemes who have been ignoring this issue. 

 For  employers new to workplace pensions, warnings need to be in place for net pay schemes. We are now categorising workplace pensions not as trust and contract based but as Net Pay and Relief at Source schemes. This is more meaningful for small employers who can choose an occupational scheme like NEST or People’s Pension which will offer relief at source.

Isn’t it time for some clear guidance to be issued for the 1.8m employers still to stage auto-enrolment and for the 73,000 who already have? If the existing channels are proving ineffective, I will be happy to step up to the plate and make sure www.pensionplaypen.com does its bit!

I’m assuming that your wider analysis of auto-enrolment costs assumes “accidental enrolments”. While sophisticated payroll departments probably dealt with them through postponement, I am not sure that employers going forward will have the same care and attention paid to low earners with fluctuating payments.

The DWP is calling, (as this blog has been calling all year), for employers to “ask their provider about the tax implications before taking a decision about the scheme they chose”.

But where is this information to be found? I see no wealth warnings on net pay provider products warning against use by those earning less than £11k. What’s worse, I see no action from the PLSA and its constituency of large occupational workplace schemes, to convert those operating on net pay to RAS. They are asleep at the wheel.

The beneficiary of this inaction is going to be the HMRC which is going to be let off paying the “Government Incentive” to those on low earnings in net pay schemes and the losers are going to be those who have least, those on low variable earnings, people on zero hours contracts, those on unusual shift patterns, the personal service workers with irregular billings and part -timers with regular earnings of between £10-11,000 pa.

These people should not be in net pay schemes, the Pension Minister says this herself.

And she is being listened to..

The Pensions Regulator has indeed updated its website, but a fat lot of good that is for those already in and a fat lot of good it is for workers about to go into net pay schemes with witless employers taking decisions prompted by witless IFAs/accountants and intermediaries.

When I say “witless”, I mean “foolish and stupid” and perhaps I should qualify  this by saying that it is their behaviour that is witless – intermediaries are not inherently foolish and stupid!

Getting off tax-free?

This chart appears in the DWP’s paper. It shows the tax relief payable next year against employee contributions running at 30% (280/910). Let’s hope that that calculation includes the substantial number of workers who will get no tax relief against their contributions.

The DWP calculate the shift in the bands will only cost an extra £3m in tax relief – I suspect the HMRC were pretty happy with that, but I’m not sure I am.