The Department for Work and Pensions published the proposals, which will affect up to 900,000 young employees, after a consultation on the current scheme to ensure British people are setting aside enough funds for their retirement.
At present, auto-enrolment applies only to those working in private and public-sector organisations aged 22 and above, who earn more than £10,000 from one job. Contributions are typically calculated based on the amount an individual earns above the lower earnings limit of £5,876.
The recent consultation of the existing scheme recommended that pension contributions be measured from the very first pound earned, as opposed to the lower earnings threshold.
Removing the lower earnings limit and lowering the age limit to 18 would cost employers an additional £1.4 billion in pension contributions.
Individuals will continue to have the option to opt out of auto-enrolment if they wish, although in doing so they will not receive their employers’ contribution to their workplace pension.
The total minimum contribution for auto-enrolment is 2% of earnings – of which at least 1% must come from employers, 0.8% from employees and 0.2% from Government tax relief. The minimum contribution figures are set to increase both in April 2018 and April 2019 respectively:
From April 2018 – Minimum contribution for auto-enrolment will rise to 5% of earnings (of which a minimum of 2% must come from employers).
From April 2019 – Minimum contribution for auto-enrolment will rise to 8% of earnings – 3% from employers, 4% from employees and 1% from Government tax relief.
These proposals also recommend annual reviews for suitable thresholds when auto-enrolment is triggered (currently £10,000 or more) and the use of technology to encourage Britain’s army of 4.8 million self-employed professionals to save for retirement.
Mike Cherry, National Chairman, Federation of Small Businesses (FSB), said: “Requiring employers to contribute from the first pound of earnings will mean that, by 2019, hundreds of thousands of small employers will have to pay up to £180 more per employee each year.”
However, David Gauke, Secretary of State for Work and Pensions, insists that while “the world of work is changing” it is “only right that pension saving does too”.
“We are committed to enabling more people to save while they are working, so that they can enjoy greater financial security when they retire,” said Gauke.
“This ambitious package will see more people than ever before helped onto the path towards building a secure retirement.”
Failure for small businesses to enrol qualifying employees into a workplace pension scheme by their auto-enrolment staging date will result in hefty fines from The Pensions Regulator.