Pension Qualifying Earnings

1 August 2024 / Insight posted in Articles

In September 2023, the extension of the automatic bill passed its third reading in the House of Lords and received Royal Assent.

The main changes are:

  • Lowering the minimum age at which a worker must be auto-enrolled from age 22 to 18; and
  • Removing the lower limit of the ‘qualifying earnings band’ (£6,240 in 2024/25), so that contributions are paid from the first pound of earnings.

This will improve the pension prospects of younger and lower-earning employees. By saving into a pension from an earlier age, combined with the compounding effect of investment returns over a longer period, this will help younger employees build up larger pension pots. The changes will have a financial impact for many employers and employees with increased pension contribution costs. Although there are no plans in the proposals to remove or increase the upper earnings threshold, this could happen at some stage in the future.

Implementing these changes will not happen overnight. The government is now working on an implementation plan, which industry professionals estimate will take place over the next two to three years.

Baroness Ros Altmann stated, “I look forward to the promised early consultation to confirm the details and timing of the regulations, which will see the provisions of the bill implemented by all employers.”

The changes when implemented will affect employers that use Qualifying Earnings as their pensionable salary definition and/or employers that employ younger workers. Qualifying Earnings is a band of earnings you can use to calculate pension contributions and is used by many employers. The figures are reviewed annually by the government.

For the 2024/25 tax year it is £6,240-£50,270 a year. If an employer uses Qualifying Earnings as their pensionable salary definition, they will contribute a percentage of the worker’s earnings that fall between these thresholds. The first £6,240 isn’t included, so qualifying earnings can’t be more than £44,030 (£50,270 minus £6,240). For example, if a worker earns £20,000 their qualifying earnings would be £13,760 and if the worker earns £60,000 their qualifying earnings would be £44,030.

It remains to be seen whether the proposed changes will have the desired effect of boosting employee’s retirement savings in the long term. Reducing the automatic-enrolment age to 18 may see an increase in opt-outs amongst younger employee’s, particularly given the minimum contribution will now be a larger proportion of their take home pay.

Current minimum pension contribution percentages for employers using qualifying earnings as their pensionable salary definition is 3% from the employer and 5% from the employee (4% before tax relief is added).

Approximate additional annual pension costs for an employer using qualifying earnings and minimum contribution percentages are:

  • Employer 3%; an increase of £187.20 per annum (£15.60 per month) per employee
  • 10 employees £1,872
  • 50 employees £9,360
  • 100 employees £18,720
  • 500 employees £93,600

For each employee earning above the Qualifying Earnings threshold and contributing 5% of their pensionable salary, the increased pension contributions will be:

  • Employee 4% (net of Basic Rate Tax) an increase £249.60 per annum (£20.80 per month)

Although it has not been confirmed when these changes will take effect from, it is important employers and employees are aware of the changes as early as possible, so if it affects them, they can start planning for the increased costs.

Moore Kingston Smith can help employers plan for the change, ensure they comply with the new regulations and possibly mitigate some of the cost by introducing Pension Salary Exchange, if they do not currently use it.

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