The paper argues that tax thresholds are the largest mitigating factor on take-home pay for a low earner. While April’s increase in auto-enrolment contributions for someone earning £15,000 will reduce take-home pay by £2.81, the change to the tax threshold will increase take-home pay by £1.35. The NI threshold change will increase net pay by 60p, and the change to the AE band will also add a further 7p to take-home pay, meaning the £15,000 earner will be 79p a week worse off.
However, taking inflation into account, someone earning £15,000 a year will need a 3.4 per cent pay increase to maintain their take-home pay in real terms. For someone on £45,000, a 4.1 per cent increase in pay will be needed to maintain spending power.
The paper argues that higher earners are proportionally more impacted by auto-enrolment contribution increases under a band earnings system than lower earners. The effect of the automatic enrolment changes on weekly take-home pay is a reduction of £2.74 a week for a person earning £15,000, before tax and NI changes are factored in, whereas it is £11.97 a week for a person earning £45,000.
This is because a smaller proportion of a lower-paid employee’s earnings is included in the band earnings so a lower proportion of their salary is affected by the increase in pension contributions.
A £25,000 earner’s take-home pay falls by £5.81 a week through increased contributions, but tax and NI changes reduce that effect by £1.95 to a reduction in take-home pay of £3.86 a week. The research argues that pay increases could also offset impact on take-home pay. A pay increase of 1.2 per cent would enable the £25,000 earner to maintain take-home pay.
For people earning at the National Living Wage, the increase in the level of the National Living Wage may be enough to overcome the increase in employee contributions.
Employer contributions are also increasing, leading to higher overall remuneration. The £25,000 earner’s remuneration increases by around £7 a week, even without an increase in gross pay.
The report says many members of pension schemes are already contributing at a rate above the minimum level so may not face an increase in their contributions.
It also points to analysis of employees reactions to contribution increases in the USA where employee participation rates have remained relatively unchanged following increases. Of those people contributing to schemes that have implemented contribution increases, around 92 per cent of members are contributing at or above the increased default contribution rates.
