Tax changes to soften blow to take home pay caused by AE contribution rise

Tax changes, coming into force on the same day (6 April) as the auto-enrolment (AE) minimum contribution increase, could soften the blow to savers’ take home pay packets, Now Pensions has revealed.

Due to changes in minimum earning levels for some tax payments, AE workers could see nearly 53 per cent of their extra pension contributions paid for, as they don’t have to begin paying certain taxes as early.

The starting point for national insurance will rise from £8,424 per year to £8,632, the income tax personal allowance earnings level will increase from £11,850 per year to £12,500 and the qualifying earnings lower limit for pension contributions will rise from £6,032 per year to £6,136.

The rise in the employee AE contribution level, from 3 per cent to 5 per cent, will reduce the take home pay of someone earning £25,000 annually by £302 per year.

However, this will be partly offset by the tax changes, which will result in a saver earning £25,000 per year taking home an extra £159 per year.

Now Pensions calculated that the change in minimum earning levels for national insurance, income tax personal allowance and pension contributions will put £25, £130, and £4 per year respectively into pay packets.

Commenting on the findings, Now Pensions director of policy, Adrian Boulding said: “Thanks to these tax changes, when people look at the bottom right hand side of their pay slip in April, they are much less likely to be worried by the increase to their pension contributions.

“By cushioning the impact, hopefully people will continue to save and resist the siren call of spending. Putting away a little bit more each month will, together with the increased employer contribution, make a big difference to savers’ future retirement prospects.”

For those on the national living wage (£17,000 per year) will see their pay increase by £696 annually due to an increase in minimum wage and the tax changes, while their extra pension contributions will only reduce their annual take home pay by £175.

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