Ryan Oates
Posted By Ryan Oates
26/09/2023

Following the recent news that the ‘Extension of Automatic Enrolment (AE) Bill’ has passed its Third Reading in the House of Lords and received Royal Assent, there are clear implications for the direction of travel for Automatic Enrolment and Workplace Pensions.

The 2 key changes being proposed are:

  1. lowering the age which eligible workers must be automatically enrolled into a pension scheme from 22 years old to 18 years old; and
  2. removing the Lower Earnings Limit (LEL) from the ‘qualifying earnings’ band so that contributions are calculated from the first pound earned (rather than the current lower earnings limit threshold (£6,240 in 2023/24)).
    We believe this may be carried out over two to three years starting no later than April 2025.

Whilst this is good news for employees, as they will begin saving sooner and more of their earnings will be pensionable – this will have a cost implication for businesses. Therefore it is important businesses begin to budget for this change in legislation.

The removal of the LEL will only impact your business if you currently operate using ‘qualifying earnings’. This is the default method and is in line with the statutory minimums. Whilst it is common, many businesses use other pensionable earnings methods such as ‘basic salary’ or ‘total earnings’. If your business uses these alternative methods, then the change to the LEL will not impact you (as you are already contributing from the first pound).

The additional employer contribution per employee per year can be found below (this assumes that you operate ‘qualifying earnings’), depending on your employer contribution %:

Employer contribution Additional employer contribution cost per year employee (who is in the pension scheme)
3% £187.20
4% £249.60
5% £312.00
6% £374.40

The additional contribution by employees per month will be:

Employer contribution (gross) Additional employer contribution cost per year employee (who is in the pension scheme)
4% £20.80
5% £26.00
6% £31.20
Employee contribution will benefit from tax relief at their marginal rate and the net cost of the gross contribution above will be lower.

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