Rise in auto-enrolment contribution rates to coincide with Budget changes to income tax and NICs for 2018/19

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The rise in auto-enrolment contribution rates in April coincides with the Budget changes to income tax and NICs for 2018/19. So far, little attention has been given to the interaction. It looks as if the people worst hit in terms of the greatest extra deductions from pay will be those with earnings marginally above the 2017/18 higher rate threshold.

Ros Altman explained at last year’s Technical Connection Conference, the reason for moving the auto-enrolment contribution increases from October to the following April was to tie in with tax and NIC changes. The hope was that the usual indexation process for the personal allowance, income tax and NIC bands would ease the pain of higher contributions (or at least muddy the waters). And you thought it was just George Osborne scrimping a little saving on the cost of pension contribution tax relief…

The press is now latching onto the forthcoming rise in the employee contribution rate from 1% to 3% (assuming the employer pays the minimum required). However, once you add in the tax and NIC changes announced in the Budget, the picture is rather more nuanced than the headlines suggest. Here are three (non-Scottish) examples that make the point.

Employee earning £26,000 a year

2017/18 2018/19
Basic rate (£26,000 – £11,500) @ 20% = £2,900.00 (£26,000 – £11,850) @ 20% = £2,830.00
NICs 12% (£26,000-£8,164) @ 12% = £2,140.32 (£26,000-£8,424) @ 12% = £2,109.12
AE (20% relief) (£26,000-£8,164) @ 0.8% = £142.69 (£26,000-£8424) @ 2.4% = £421.82
Total deductions £5,183.01 £5,360.94
Change in net pay -£177.93 (-£3.42 pw)

Employee earning £46,350 a year

2017/18 2018/19
Basic rate (£45,000 – £11,500) @ 20% = £6,700.00 (£46,350 – £11,850) @ 20% = £6,900.00
Higher rate (£46,350 – £45,000) @ 40% =  £540.00 NIL
NICs 12% (£45,000-£8,164) @ 12% = £4,420.32 (£46,350-£8,424) @ 12% = £4,551.12
NICs 2% (£46,350 – £45,000) @ 2% =  £27.00 NIL
AE (net of tax relief ) (£45,000-£8,164) @ 0.6%  = £221.02 (£46,350-£8,424) @ 2.4%  = £910.22
Total deductions £11,908.34 £12,361.34
Change in net pay   -£453.00 (-£8.71 pw)

Employee earning £50,000 a year

2017/18 2018/19
Basic rate (£45,000 – £11,500) @ 20% = £6,700.00 (£46,350 – £11,850) @ 20% = £6,900.00
Higher rate (£50,000 – £45,000) @ 40% = £2,000.00 (£50,000 – £46,350) @ 40% = £1,460.00
NICs 12% (£45,000-£8,164) @ 12% = £4,420.32 (£46,350-£8,424) @ 12% = £4,551.12
NICs 2% (£50,000 – £45,000) @ 2% = £100.00 (£50,000 – £46,350) @ 2% = £73.00
AE (net of 40% tax relief ) (£45,000-£8,164) @ 0.6%  = £221.02 (£46,350-£8,424) @ 1.8%  = £682.67
Total deductions £13,441.34 £13,666.79
Change in net pay   -£225.45 (-£4.34 pw)

The individual earning £46,350 suffers the biggest loss because:

• Their gross contribution rate triples;
• They lose higher rate tax relief on all their pension contributions because they cease (just) to be higher rate taxpayers;
• They are caught by the full increase in the AE contribution upper limit of £1,350; and
• They suffer the same £1,350 increase in the upper earnings limit for full rate (12%) NICs.

Those further up the earnings scale do not suffer as much because of the benefit of higher rate relief on contributions.

Source: https://www.techlink.co.uk/user/knowledge/?df

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