The top band of qualifying earnings for auto-enrolment has been confirmed as being the NI upper earnings limit of £42,475, but confusion remains over what happens when it falls in 2013.
The new upper threshold for auto-enrolment is more than £2,500 higher than the £39,853 limit confirmed by the DWP in December.
The “earnings trigger” above which employees are enrolled (£8,105), and the bottom of the “qualifying earnings” band (£5,564) have been confirmed as expected.
The DWP says the new upper threshold is designed to align it with the National Insurance Upper Earnings Limit. But it has not said what happens in 2013/14 when the UEL is set to fall to £41,450 as set out in the Budget.
There is also no explicit detail on whether the earnings trigger will remain aligned with the income tax personal allowance when this rises to £9,205 in April 2013. DWP says it believes that “thresholds should be aligned with existing recognisable rates used in payroll wherever possible, but cannot anticipate the outcomes of future reviews”.
Rudi Smith, senior consultant at Towers Watson says: “Compared with the proposals published in December, minimum contributions are now due in respect of an extra £2,622 of income. While minimum employer contributions are 1 per cent of qualifying earnings, the impact will be about 50p a week for employees earning £42,475 or more. Of course, only employers with at least 6,000 people in their PAYE arrangement will have to comply while these earnings thresholds are in place and many of these will not limit pensionable pay to qualifying earnings in any case. However, some may have to revisit aspects of the financial modelling they have done around auto-enrolment.
“Perhaps more significant is what happens next. Under the original legislation, all of the automatic enrolment thresholds would have increased with national average earnings each year. The Government changed the law so it could adjust these numbers however it sees fit. It is keeping its cards close to its chest when it comes to how this power will be used in future.
“This announcement provides few clues as to what will happen to the top of the qualifying earnings band when the National Insurance Upper Earnings Limit is reduced in April 2013. The Government says that ’simplicity is critical to the success of automatic enrolment’ and that ’simplicity is best supported by aligning automatic enrolment triggers and thresholds with existing payroll thresholds’. However, it goes on to say that aligning the top of the qualifying earnings band with the upper earnings limit in 2012/13 ’does not set a pattern for the future’. Last week’s Budget announced that the Upper Earnings Limit will fall from £42,475 to £41,450 in April 2013. Is it likely that the qualifying earnings band will shrink at the same time? If not, how much is gained by aligning the two numbers for the first six months in which some employers must comply and then decoupling them?”