Pensions thresholds freeze: What are the effects?

For 2022/23, the auto enrolment/workplace pensions thresholds have been frozen at the 2021/22 levels. What are the reasons for the freezes and the implications both now and in the future?

There are three thresholds:

• The Earnings Trigger is the level of earnings in the pay reference period that starts (triggers) the auto-enrolment process for employers.
• If the worker is in a pension scheme that takes contributions on band earnings, once the auto-enrolment process has been triggered, the employer will start to take contributions from the Lower Qualifying Earnings Band (QEB).
• In a band earnings scheme, contributions cease to be payable once earnings reach the Upper QEB.

On 8 February 2022, the Department for Work and Pensions (DWP) published their Review of the automatic enrolment earnings trigger and qualifying earnings bands for 2022/23 supporting analysis, as required by legislation. This confirmed that all of these thresholds are frozen at 2021/22 levels, which translates as follows for common pay reference periods:

Therefore, in a band earnings pension scheme, once earnings reach the trigger in the pay reference period, contributions are payable on the earnings between the Lower and Upper QEB. For example, on a weekly payroll, auto enrolment is triggered at £192, at which time contributions are payable between £120 and £967, that is £847 (£967 less £120).

A different freeze

However, this freeze is different from the ones I have already mentioned:

1. There is no legislation that prescribes these will increase every year. They are reviewed every year and may change.
2. While the link with the personal allowance for the earnings trigger was broken years ago, convention always linked the value of the Lower and Upper QEBs to the value of the Lower and Upper Earnings Limit (LEL and UEL) for National Insurance.

From 2022/23 there is a divergence and another threshold for employers to remember and for software to facilitate. Note that the Upper QEB remains aligned in value to the UEL for National Insurance, so it is the variance between the Lower QEB and LEL that needs to be highlighted.

The freezing reason

While the supporting analysis says freezing the Lower QEB “supports the principle of ensuring that everyone who is automatically enrolled would continue to pay contributions on a meaningful proportion of their income”, the same analysis points to the December 2017 Automatic Enrolment Review. This 2017 review states the “ambition” to remove the Lower QEB altogether in the mid-2020s.

So, if the ambition is to abolish the Lower QEB in a few years’ time, it does make sense to freeze the threshold now, removing the link with the LEL.

The freezing implications

There are several key takeaways for employers by this freeze in 2022/23:

• Freezing the Lower QEB does mean a cost freeze.
• Employers have to divorce themselves from linking the Lower and Upper QEBs to the LEL and UEL for National Insurance (it is a coincidence that the Upper QEB is linked to the UEL).
• The Lower QEB must be regarded as the point at which a worker and their employer will start to pay contributions if the pension scheme calculates them using band earning.
• The LEL is, and always was, the value of earnings that allows entitlement for certain State benefits, for example, the State Pension or those paid by the employer such as SSP and SMP.
• An individual earning at the Lower QEB will fall into the category of being a non-eligible job-holder, though will not qualify for State benefits until their earnings reach the LEL.

As we progress to the mid-2020s and the 2017 review’s ambition to abolish the threshold altogether, this has three impacts:

1. In a pension scheme that calculates contributions on band earnings, the worker will pay from the first £1 of earnings.
2. Similarly, the employer will also pay from the first £1 of earnings.
3. The number of non-eligible jobholders will increase, meaning the number of possible opt-ins to a pension scheme will also increase.

Employers (and workers) should also note the other mid-2020s ambition, which is the reduction in the lower auto-enrolment age limit from 22 to 18. This has the impact of bringing more workers into pension saving, the very purpose of the 2017 review entitled Maintaining the Momentum. Abolishing the Lower QEB and reducing the auto-enrolment age limit are not cost freezes. 

Ending on a positive note, the abolition of the Lower QEB will have the impact of removing the worker status Entitled Worker, that is one that is entitled to join a pension scheme rather than opt-in. 

The other freezes

Tax year 2022/23 will probably be remembered by employees for a lot of wrong reasons, as this is the year of the big “threshold freeze”:

• The Personal Allowance is frozen until April 2026 at £12,570, the 2021/22 level
• The Marriage Allowance, aligned at 10% of the Personal Allowance, is frozen at £1,260
• The UK Basic Rate limit is frozen at £37,700, also until April 2026 meaning that the UK Higher Rate threshold is £50,270, also until April 2026
• The Plan 2 and 4 Student Loan thresholds are frozen at 2021/22 levels and we await an announcement later in the year as to what levels they will be in 2023/24
• The Lifetime Allowance (LTA) is frozen at £1,073,100 until April 2026 (in fact all pension allowances are frozen for 2022/23).

Although, it is worth pointing out that the Primary Threshold for National Insurance Contributions does increase to £12,570 per annum from 06 July 2022.

Of course, the impact of freezing is that, as salaries increase, more individuals will be drawn into the tax system, perhaps paying for the first time. This is good for HM Treasury, not so good for the individual who will have expected thresholds to increase in line with an inflationary indicator mechanism such as the Consumer Prices Index (CPI). The fact that legislation states they should have been inflated means little, as legislation can be changed.