The Government has confirmed the following figures, relating to the new automatic enrolment obligations, for the 2012/13 tax year:
- £8,105 for the automatic enrolment earnings trigger, equal to the PAYE threshold,
- £5,564 for the lower limit of the qualifying earnings band, equal to the NICs LEL, and
- £42,475 for the upper limit of the qualifying earnings band, equal to the NICs UEL.
Background
When individuals are auto-enrolled into a pension arrangement under the new regime, contributions will be paid as a percentage of their earnings within a “qualifying earnings band”. This band was set (in 2006/07 earnings terms) in the Pensions Act 2008 as earnings between £5,035 and £33,540.
There is also an “automatic enrolment earnings trigger”: people earnings less than this trigger will not have to be auto-enrolled. This trigger was set at £7,475 (in 2011/12 terms) in the Pensions Act 2011.
The Government is required to review all these figures ahead of each tax year and to decide whether or not they should be changed. The review may take into account:
- personal taxation allowances,
- earnings thresholds and limits for National Insurance purposes,
- the level of the Basic State Pension and
- the general level of prices.
In addition, the Government considered the following principles:
- maximising the number of people brought into pension saving who will actually benefit from saving, while avoiding the automatic enrolment of those who are unlikely to benefit,
- the gap between the bottom of the qualifying earnings band and the earnings trigger should be such as to ensure so that all those who are automatically enrolled benefit from a meaningful level of contributions,
- costs and benefits to individuals and employers should be balanced appropriately.
The automatic enrolment earnings trigger
The level of the automatic enrolment trigger should strike a balance between maximising pension saving for those for whom saving is valuable and minimising the automatic enrolment of those for whom it is not. The 2010 review of the proposed regime recommended that the trigger be equal to the income tax threshold.
A reduction in the earnings trigger would bring more of the very low paid into the scope of automatic enrolment but would also increase employer costs. However, the Government’s analysis suggests that raising the trigger above £5,983 would cause a reduction in overall pension saving under automatic enrolment.
Keeping the trigger at the PAYE threshold ensures that low earners who do not earn enough to pay income tax are not caught by automatic enrolment. The Government has concluded that this is an appropriate level for the earnings trigger.
The qualifying earnings band
When the band of earnings was introduced through the Pensions Act 2008, the lower limit was aligned with the level at which individuals begin to pay National Insurance contributions (NICs). The higher level was aligned with the NICs upper earnings limit.
The 2010 review recommended that the lower limit of the qualifying earnings band be aligned with the NICs primary threshold but that the upper limit be increased in line with average earnings.
Aligning the lower limit of the qualifying earnings band with the NICs threshold ensures that everyone who is automatically enrolled pays contributions on a meaningful portion of his income and that the band is aligned with thresholds that are already familiar to employers.
An increase in the upper limit in isolation would increase both employer contribution costs and some individuals’ savings levels (only those earning above the current band). The Government stated that it does not consider this a viable option in current economic circumstances and this consideration led it to propose an upper limit of £39,583. (This was the 2008 limit increased in line with Consumer Price inflation.) However, responses to the consultation established that the principle of simplicity was valued more highly than containing the upper limit.