The increase in the personal allowance to £10,500 a year could mean fewer employees are automatically enrolled into a workplace pension scheme.
The increase, announced in the Budget 2014 by Chancellor George Osborne, will take effect from April 2015.
Consequently, the average basic-rate taxpayer will pay £805 less income tax per year in cash terms from April 2015, with around 288,000 individuals no longer paying any income tax.
However, use of the personal allowance as a trigger for auto-enrolment means fewer employees will now be eligible.
Robin Hames, head of marketing at Capita Employee Benefits, said: “Assuming the government’s practice of linking auto-enrolment to the tax threshold continues, from next year no one earning less that £10,500 will qualify. This means that many thousands more employees who would previously have been automatically entered into a workplace pension, will not be.
“While many will welcome a raise to the personal allowance, it’s important to consider whether it’s prudent to continue using it as the earnings trigger for auto-enrolment. After all, auto-enrolment was introduced because people weren’t saving for retirement, so increasing thresholds may undermine a, so far, successful initiative.”
Zoe Lynch, a partner at law firm Sackers, added: “The whole thrust [of the Budget] is to support savers. What the government is doing, on one hand, is saying it is going to trust people with their defined contribution (DC) pension.
“But this trust is available due to three pillars, one of which is auto-enrolment. If this falls away, it is harder to justify flexibility on DC pensions.
“People [who are ineligible] for auto-enrolment almost certainly won’t have any other form of pension provision, so will be relying on the triple lock and flat-rate state pension.”
But employers should also consider that some impacted individuals may not have met other auto-enrolment eligibility criteria, said Lynch.
The personal allowance rising to £10,500 will mean that many low-income employees will be better off. However, if the personal allowance remains linked to auto-enrolment eligibility, it also means that some workers who are currently being automatically enrolled into a workplace pension will no longer fit the criteria, and will therefore no longer be saving for retirement.
Although excluding more people from the legislation will save some employers money in contributions, this change is yet another example of the complex and evolving auto-enrolment legislation that businesses need to navigate on an ongoing basis. With almost 600 businesses having already been investigated for non-compliance, we’re urging employers to seek help with the process to avoid being caught out and to meet their auto-enrolment obligations, both for staging and on an ongoing basis.
The personal allowance increase to £10,500 could have an impact on auto-enrolment providers, where systems may need to be amended accordingly. Everyone has planned for the threshold to be £10,000, to change it to £10,500 12 days before it goes live, in my opinion, is likely to cause software providers some headaches. As the sector enters a busy few months
ahead, this could prove interesting.