Pensions insight
“Pension contributions triple next April”
Henry Tapper, founder of Pension PlayPen, provides advice on what to say to staff
M any small employers we talk to are keen to work out what happens next with automatic enrolment (AE). They want to model the cash-flow implications for their businesses and evolve a communication programme as part of the reward strategy. What happens next for most employers is an increase in minimum pension contributions from 1% to 2% from April 2018 and from 2% to 3% a year later; and contributions for most of the estimated 9,000,000 new employees workplace pensions will triple from 1% to 3% in 2018 and jump from 3% to 5% in 2019. However, how this will work in practice depends on the type of workplace pension scheme in use. If the scheme operates under the relief at source (RAS) rules, the employee payroll deduction is 20% less than the amount received by the scheme as the rest is claimed from HM Revenue & Customs by the provider. If the scheme operates under ‘net pay’ (NP), then tax relief is obtained according to the employee’s tax band. Tip – Before talking to staff about the impact of the pension contribution increase understand the taxation basis of your pension scheme. A communication strategy for April 2018/19 must take account of the basis of pension taxation. Staff who are nil-rate tax-payers in a RAS scheme get the equivalent of tax- relief which the government calls ‘an incentive’. Though the financial impact of the incentive is negligible on 1% of earnings, it is progressively more important as contributions treble and then increase fivefold. Higher rate taxpayers (HRT) have a different tax-treatment depending on the scheme. In a NP scheme, tax relief will be given in full as a matter of course; but in a RAS scheme, the HRT is responsible for claiming the top slice of tax relief through
self-assessment or through a tax coding adjustment. This is fiddly and is why a lot of old-fashioned schemes operate on a NP basis. Tip – Different messages are needed for staff in NP and RAS schemes. If you’ve got the wrong basis of taxation for your staff, look again at your pension provider and at ways to remedy the situation. If you have staff in a NP scheme who are getting no tax relief, you should seriously consider whether such a scheme is right for your low earners. The opposite may be true if your workforce are generally higher rate taxpayers. The messaging about the impending increases in pension contributions must be sensitive to the AE legislation. Penalties apply to employers who are seen to be frightening staff out of their workplace pensions – and that is precisely what you may be doing if you phrase your communications in the wrong way. Warning staff that their contributions will be ‘tripling in 2018’ runs just such a risk. Tip – You should take care not to scare the horses with tales of woe about pension contributions. In practice, for those staff most vulnerable to small fluctuations in take-home, the immediate impact of the changes in 2018
and 2019 will be mitigated not just by tax relief/incentives but by broader changes in the months and years to come. The graph below is based on an extrapolation of taxation trends and previous indications by the chancellor of the direction of travel for personal taxation thresholds/bands etc. There are a lot of unknowns (e.g. qualifying earnings (QE) banding thresholds) for the next two financial years. Some will be more certain after the next Budget and once the AE thresholds for next year are set. The graph is for members of a legal minimum QE banded scheme, using RAS, and illustrates the combined impact of tax, National Insurance and the phased increase in contributions. It doesn’t show the national living wage or average earnings values over time, so the lines may move when those change. What it shows – if my finger-in-the- air guestimate is at all accurate – is that full-time workers on below-average wages could see their net pay go down by £20 a month or less, each time the pension contribution increase comes into effect. Put like that, it is unlikely that most low earners will even notice the impact of the increased contribution. Q Tip – If you’re going to talk numbers, ensure they are accurate. Do some modelling and consider talking to an expert on the net impact of AE phasing on net reward.
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| Professional in Payroll, Pensions and Reward |
Issue 34 | October 2017
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