Personal allowance increase could impact auto-enrolment eligibility

The increase in the personal allowance to £10,500 a year could mean fewer employees are automatically enrolled into a workplace pension scheme.

Autoenrolment

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.