New pensions enrolment rules would hit 500,000 of the lowest paid workers

IONA BAIN

tax-relief,” Mr Tapper explained. “These people will see their minimum contributions increase by 500 per cent over the next two years, but they will not see this blow cushioned in any way by the incentives enjoyed by higher earners.”

Mr Tapper, whose firm advises companies on workplace pensions, said the plans will hit poorer workers’ wages “disproportionately hard” and exacerbate the current injustices of the pension taxation system.

He said: “I want to see the end of pensioner poverty, but I don’t want that to be achieved by making ordinary families save so hard that they cannot have a decent standard of living while working.”

The Department for Work and Pensions (DWP) has estimated that around 280,000 people who earn between £10,000 and £11,500 – the current point at which income tax kicks in - would not benefit from tax relief on their contributions if enrolled in a pension scheme that uses a net pay arrangement.

This number would rise to 500,000 if the tax-free personal allowance rises to the Government’s target level of £12,500 by 2020, according to pensions firm Royal London.

And even more could be affected by the decision to regularly review the earnings trigger for auto-enrolment.

Net pay is used by most companies in the UK but notable exceptions include NEST, the pension scheme for smaller employers set up by the Government.

It deducts 80 per cent of employees’ pension

The new rules, if passed by MPs, would come into force in the middle of the 2020s.

contribution from pay and claims the other 20 per cent from the Government.

NOW: Pensions, one of several private alternatives to NEST, technically operates a net-pay scheme, but tops up the pension pots of non-taxpayer members to make up for the tax relief shortfall.

David Finch, senior economic analyst at the Resolution Foundation, said workers would face an “increasingly tough choice” between saving and earning due to a “very weak outlook” for wage growth.

The problem will be compounded by minimum pension contributions rising to eight per cent by April 2019, with employees putting in five per cent. Mr Finch said this will drag the average worker’s pay down by more than £900 a year.