AE earnings threshold remains at £10,000 for 2019/20

Written by Jack Gray
05/12/2018

Pensions Minister Guy Opperman has confirmed that the auto-enrolment earning threshold will stay frozen at £10,000 for 2019/20.

The government also announced that the lower limit qualifying earning band would increase from £6,032 to £6,136 and the upper limit will increase from £46,350 to £50,000.

Furthermore, the personal allowance for income tax will increase from £11,850 to £12,500, which will increase the band of earning over which workers are affected by around 35 per cent.

This could create “a chasm” between the point at which people are enrolled into a pension and the point at which they start paying tax, according to Royal London director of policy, Steve Webb.

He continued: “This means hundreds of thousands more workers will find that whether or not they get tax relief will depend on the lottery of what pension arrangement their employer has chosen for them.

“The government cannot keep kicking the can down the road on this issue.”

Two types on pension arrangement are typically used, with pension schemes that use the ‘relief at source’ system delivering tax relief to non-taxpayers, but schemes which use the ‘net pay arrangement’ system generally do not.

The concern is echoed by AJ Bell senior analyst, Tom Selby: “The ‘net pay’ auto-enrolment problem looks set to get worse before it gets better as the gap between the point at which members pay income tax and the earnings level at which they get automatically enrolled widens from April next year.

“The Department for Work and Pensions has now passed the buck to HMRC, hoping that the shift to becoming ‘one of the most digitally advanced tax administrations in the world’ will provide a ready-made solution. But until that happens this pension tax injustice will continue.”

Latest estimates from HMRC suggest that around 1.22 million workers may be affected by this issue and missing out on tax relief.

From April 2019, the minimum contributions for a qualifying pension scheme will rise from 5 per cent to 8 per cent of qualifying earnings, and the minimum employer contribution will increase from 2 per cent to 3 per cent.

The increase in minimum contribution rates drives an estimated £5.5bn increase in the estimate of contribution costs in 2019/20, relative to the previous year.

By 2019/20, the government estimates that there will be an extra £18.4bn of workplace pension saving per year as a result of automatic enrolment, before the impact of threshold changes is taken into account.

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