Automatic Enrolment Thresholds 2013/14

December 19, 2012

The Government has confirmed the following figures, relating to the new automatic enrolment obligations, for the 2013/14 tax year:

  • £9,440 for the automatic enrolment earnings trigger, equal to the PAYE threshold,
  • £5,668 for the lower limit of the qualifying earnings band, equal to the NICs Lower Earnings Limit, and
  • £41,450 for the upper limit of the qualifying earnings band, equal to the NICs Upper Earnings Limit.

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, as last year, 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.

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 continues to believe that this is an appropriate level for the earnings trigger.

With limited experience of “live” auto-enrolment so far, the majority of respondents to the Government’s consultation agreed that aligning the threshold with the PAYE threshold reduces complexity and so is welcome.  There is some concern, however, that changes in personal taxation policy may lead to inconsistencies as to who gets auto-enrolled from time to time.

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.

The Government considered whether the upper limit should continue to be aligned with the Upper Earnings Limit for NICs – as last year – even though that limit will be lower for 2013/14 than it was for 2012/13.  The alternatives considered were to freeze it at the 2012/13 level of £42,475 or increase it in line with average earnings, to £42,971.  It decided, on balance, that the principle of alignment was appropriate, given that only higher earners (and their employers) would be affected.  Most respondents agreed, noting in particular that the current low rates of contribution required under auto-enrolment mean that the maximum reduction in annual contributions would be £23!

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