I was taking some advice on auto enrolment yesterday from Redwood Employee Benefit Services and when I did some calculations, I was shocked at the impact that auto enrolment is going to have on employees net pay, comments Phil Harris, Principal of Harris & Co accountants Northampton. Let"s say that you have an employee earning £20,000 a year. At 5%, under auto enrolment, they will have to pay £1000 a year in pension contributions. However, here"s the shock - at the moment they would pay about £3000 a year in tax and NIC. The auto enrolment pension contribution will have to come out of their NET pay not their GROSS pay! So they will now be paying £4000 a year in deductions - a whopping 33% increase!!
How many employees realise that their net income will drop from £17000 to £16000 a year?
All the current data suggests that about one in four people live from one pay cheque to the next, with nothing to fall back on. Having a 33% increase in the amount stopped from their gross pay is going to have a massive impact on them.
Employers should be braced for huge wage demands from employees. Or will employees opt out of auto enrolment on an enourmous scale?