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DWP warns on net pay schemes as earnings trigger frozen

by John Greenwood
December 15, 2015
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The government has warned small and micro employers that employees not paying tax will see more deducted from their pay packet if they use a net pay scheme for auto-enrolment.

Publishing its auto-enrolment earnings trigger and qualifying earnings band review today, the DWP confirmed the earnings trigger for auto-enrolment and the lower earnings limit for band earnings will be frozen, with the upper limit rising by £615 to £43,000.

Freezing the earnings trigger at £10,000 means an additional 130,000 individuals will be brought into scope of being auto-enrolled, 71 per cent of who are women. But the move increases the number of auto-enrolled workers who will miss out on tax relief because they earn more than the earnings trigger but less than the nil rate band.

The government estimates 180,000 workers earn between £10,000, the 2016/17 earnings trigger, and £11,000, the 2016/17 nil rate band.

The level of earnings at which contributions do not have to be paid has remained unchanged at £5,824.

The review document says the government recognises freezing the earnings trigger increases the number of people likely to miss out on tax relief through net pay schemes, but says it has had to balance this with bringing more of those excluded from auto-enrolment, including a disproportionate number of women, into scope.

The document says: “The government has considered the fact that around 180,000 workers earn between £10,000 and £11,000 and the fact that where these workers are automatically enrolled into a workplace pension that uses a net pay tax relief arrangement, these workers won’t benefit from tax relief on their contributions. Small and micro employers should ask their provider about the tax implications before making a decision on the scheme they choose.”

The Pensions Regulator has recently changed the wording in on the ‘Choose a pension scheme’ section of its website to highlight the fact that two of the four schemes that meet its Master Trust Assurance Framework standard – Now: Pensions and Welplan Pensions – do not give tax relief for auto-enrolled workers earning less than the income tax nil rate band.

Hargreaves Lansdown head of corporate pension research Nathan Long says: “The increasing gap between the earnings trigger and the personal allowance will bring net pay arrangements firmly into focus as staff earning below £11,000 who are enrolled into these schemes will miss out on the tax relief boost to their pension savings.”

 

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