Auto Enrolment: Increased contributions from April 2018
What is happening?
As of April 2018, minimum statutory contributions for Auto Enrolment will be increasing. Depending on the way you calculate qualifying earnings, you will need to start increasing levels to either 5% or 6% total (this can be made with a combinations of both employee and employer contributions). The table shows how the phased rises will be made over the next couple of tax years. Please note that employer minimum contributions are shown as ‘ER’.
The increases have fuelled speculation over whether there will be an increase in employees opting out of their pension schemes as their take home pay is reduced.
A comfortable retirement
As we all know, Automatic Enrolment was introduced to encourage workers to start building up retirement benefits. Most people are not saving enough for retirement and, as a result may not be able to afford to live comfortably in their retirement on just the State Pension. From your perspective, in order for succession, older colleagues need to retire. To accomplish this, employees need to have sufficient resources with which to retire.
The increases in pension contributions are a step towards achieving this. It is therefore important to communicate to communicate to your employees the value of the benefit being provided and provide reassurance that the impact of this may only have a limited effect on take home pay.
Changes in allowances
The Government has pledged to increase the income tax Personal Allowance to £12,500 by 2020/21 tax year. With the Allowance moving up to £11,850 from April 2018, the potential increase in the personal allowance and other increases in National Insurance (NI) thresholds could mean this combination of factors will reduce the net impact of the phased increases to an employee’s take home pay.
Even though there is a mandated increase in contributions under Auto Enrolment, the combination of a potential salary rise (however small), increase in personal allowance, and the benefit of higher savings in employee NI if deducted under salary exchange, could lead to the reduction in take home pay being less than people might imagine.
Salary exchange remains a valid and effective tool to minimise the cost to your employees of rising personal contributions and you as an employer can potentially make additional NI savings depending on how it is deployed.
Timing of communications
We suggest communicating the rise in minimum contributions as soon as possible to staff. With so many other changes that have occurred in pensions, a briefing newsletter covering not only the phased increase in contribution but also pension freedom changes, pension provider guidance on default funds, and state pension age changes may be worthwhile to help start engaging staff with their retirement planning.
Take a look at the attached letter for suggested wording on communicating the mandatory increase in contributions from April 2018 and April 2019. Please note that the letter references the 2017/18 tax year and might change in the future.