What are the proposed changes to pensions auto-enrolment?

Since its launch in 2012, pension auto-enrolment has helped more people save towards their retirement, particularly women and other lower earners.

A new Act passed in September 2023 makes changes to the current rules and will mean an increase in the number of people eligible for auto-enrolment. Although the act has Royal Assent, it hasn’t yet come into force.

To help you plan future auto-enrolment contributions, we look at what those changes mean for you and your employees and how you can mitigate extra costs.

What is auto-enrolment?

Auto-enrolment means employees don’t have to ask to join their workplace pension scheme.

As an employer, you should add staff members to your scheme without them needing to ask, as long as they meet certain eligibility conditions.

What are the current auto-enrolment eligibility rules?

Under the current auto-enrolment thresholds, you must add employees to your workplace pension if they:

• are between 22 years old and State Pension age
• earn at least £10,000 per year
• normally live in the UK

If employees earn less than £10,000 per year (but more than £6,240), you don’t need to automatically enrol them; however, they can ask to join the scheme, in which case you are obliged to add them.

What are the proposed changes?

The changes affect auto-enrolment contributions based on age and salary:

Lower earnings limit removal

Under the new rules, the minimum earnings threshold (currently £6,240 per year) will be scrapped. This means employees will start making pension contributions for every £1 they earn.

Lower age limit

The auto-enrolment age threshold will be lowered from 22 to 18.

When will the changes come into effect?

Although the Bill has been successfully passed, no official date has been announced for the changes to come into effect.

How will these changes affect employees?

By removing the earnings limit and lowering the age for auto-enrolment, it’s hoped that people will be able to save more for their retirement.

Thanks to auto-enrolment, 88% of eligible employees are now part of a workplace pension scheme (previously it was just 55%).

When the changes come into effect, the Department for Work and Pensions is predicting that the average wage earner could see their pension increase by nearly 50% if saving over their working life. The increase for minimum wage earners could be even greater, increasing to 85%.

How will these changes affect employers?

Ultimately, it means that as an employer, you’ll pay more for each employee enrolled in your pension scheme, depending on the type of scheme you run.

Many businesses expect the removal of the £6,240 lower earnings limit will be gradual. This should help employers and ensure they’re not suddenly faced with big cost increases. Nevertheless, there has been no indication of when the new rules will be enforced or how they will be implemented.

What can employers do to help reduce costs?

Reviewing your current pension arrangements can help identify where you can reduce costs. For example, looking for a provider with lower fees.

You may also be able to offset costs by setting up a salary exchange scheme. This helps to lower the amount of National Insurance (NI) you pay per employee. Some employers choose to pass on some or all of these savings to employees, but you’re not obliged to.

Salary exchange can also help employees lower their Income Tax and NI contributions as they’ve essentially agreed to give up part of their salary. This technically reduces the amount they earn, lowering what they owe in tax.

How can an employee benefits consultant help you?

Setting up and choosing a workplace pension can be complex. Not only that, if your business expands or changes in any way, your existing scheme might not be quite right. With that in mind, a benefits and pensions consultant can provide valuable help, saving you money and ensuring value for you and your employees.

If you haven’t reviewed your company’s workplace pension recently and want to start preparing for the auto-enrolment changes, you can speak to our experts.

As well as helping you navigate legislation, we’ll support you to implement the right scheme for your business and provide guidance for you and your team.

To find out more, call us on 01603 967967.