The beginning of the new tax year has brought some good news. If you’re in employment, you’re getting an automatic pay rise. On the downside, however, it could mean a slight cost to you.
As of 6th April 2018, most employees over 22 in the UK will have been receiving a hidden pay increase, but it’s not something many employers have shouted about.
It’s all due to changes to the auto enrolment scheme. Previously under the scheme, you would already have been paying a minimum of 1% towards a pension as an employee, matched by 1% from your employer to make the minimum total contribution of 2% (if you were aged 22 or over and receiving a salary of at least £10,000 per year).
Since 6th April, the minimum total auto-enrolment contribution has risen to 5%. This means that your employer now needs to put in a minimum of 2% to the pension scheme, with your contribution automatically rising to 3% to meet the total. Some employers will put in more than the minimum, in which case your contribution will simply rise to meet the difference. Next year will see further increases, with the minimum employer contribution rising to 3% and the overall total going up to 8% as of 6th April 2019.
The bottom line, however, is that your pension contribution has increased without you doing anything at all.
On the positive side, your employer is giving you more money than you would have otherwise got, even if it is not immediately accessible. On the flip side, if you have opted in to your company’s pension scheme you will need to contribute more to get the extra money, so your take home pay will decrease each month.
It’s worth highlighting that your contribution is from pre-tax salary so it will cost you less than it sounds. The increases have also been offset to some extent by the changes to income tax rates which came in at the same time, which will mean most people will be taxed less on the same earnings.
One reaction to avoid contributing more to your scheme could be to opt out, but in doing so you would, in effect, be giving up extra money from your employer – and not many of us turn down a pay rise!
To give an example, if you put £60 a month in to your pension, it would only reduce your pay packet by £48 at the basic rate of 20% tax, or £36 for higher 40% rate taxpayers (nb. if you’re earning over £150,000, you’ll be at the 45% rate). Even with the minimum contribution, if you put in £60, your employer would have to put in £40 at the 2% level, making a total of £100 extra for your pension already – at a cost of only £48 to you. At this level of saving, you’d have paid £576 (£432 higher rate) over the year but your pension would have had £1,200 added to it.
There is one instance, though, where you may need to be careful. If you already have a large pension, there is a risk auto-enrolment could put you over the lifetime allowance which has increased to £1,030,000 in the 2018/2019 tax year, so it is worth checking where you stand.
In the main, though, taking advantage of any pension contributions now will help to ensure your living standards don’t plummet in later life. If you would like to speak with one of our pension experts, get in touch here.