The Department for Work and Pensions (DWP) has announced that all earnings thresholds used for automatic enrolment will be frozen in 2022-23. As in 2021-22:
The equivalent thresholds for shorter pay periods (including month, week, etc.), as published by the Pensions Regulator, should also remain unchanged.
The surprise here is the decision to freeze the bottom of the QE band. Recent practice has been to freeze the earnings trigger (which has now been kept at £10,000 since 2014-15) while aligning the QE thresholds with the National Insurance Lower Earnings Limit (LEL) and Upper Earnings Limit (UEL). In 2022-23, the UEL is being frozen but the LEL is increasing to £6,396.
The value of default pension contributions for affected workers will be slightly higher than it would have been if the lower QE threshold had been uprated in the usual way, with DWP saying this “is consistent with the government’s ambitions to improve financial resilience for retirement, in particular among low and moderate earners”. The difference amounts to 9p/week of employer contributions where the employer pays the statutory minimum 3%. The effect will become more pronounced if the freeze is maintained over a number of years, especially if inflation is high. However, the top of the QE band will be cut in real terms if it remains aligned with the UEL, which is set to be frozen until 2026.
Previously, DWP has justified the alignment with National Insurance thresholds on the basis that this “simplifies system builds” and “provides compatibility with existing payroll systems”. It presumably concluded that departing from this principle two months before the new tax year would not prove too disruptive from a payroll perspective but affected employers may want to check this with their payroll providers.
In 2017, DWP set out an “ambition” to abolish the lower QE threshold in the mid-2020s, so that earnings from the first pound are always pensionable; this would increase contributions by half for someone working full-time on the minimum wage. Today’s document reiterates that this is a “longer term policy direction” which is subject to discussion with employers and to “finding ways to make these changes affordable”; it does not provide any new clues about when this might happen.
