Checksies ✅

Money things to read, money things to do.

1 July 2019

Good news! Why your payslip got smaller 

Hello, this is Checksies, a newsletter about how to do money. It's written by @annagoss and @rod, who are not financial advisors.

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Workplace pension contributions have increased

The new tax year started in April, and with it new pension auto-enrolment rules kicked in. These affect most people who are employees, so you might have noticed your payslip last month looking… smaller. What the living what?! Let Checksies explain what’s going on and why this is good news for you.

In short: both you and your employer are contributing more to your pension. This’ll mean you should have a larger pension for when you’re retired. But it also means that your monthly take home might now be a bit smaller because you’re contributing more to your pension.

Employees with “auto-enrolled” pensions

Why have the pension contribution amounts changed? The government wants us to save more for our retirement. It’s a good idea because we’re all living longer and many of us aren’t saving enough.

The contribution changes affect people who are employees, over 22, earn more than £10,000/year and are enrolled in their employer’s “auto-enrolled” pension scheme.

The changes

  • The minimum total auto-enrolment contribution has increased from 5% to 8% of salary - and that 8% total is made up of money your employer puts in and money you put in.
  • The minimum your employer has to contribute will increase from 2% of your salary to 3%, so that’s £100 a year extra per £10,000 of salary. This is free money to you!
  • You contribute the rest, adding up to 8% total. So if your employer is only putting in the minimum 3%, your contribution will automatically rise to 5% to meet the 8% total. That’s an increase of £200 per £10,000 salary. But if your employer is putting in more than the minimum, your contribution will not have to rise by as much to meet the total (eg, if your employer puts in 4%, then your contribution only rises to 4%).
  • You get 20% tax relief on pension contributions, which means some of the money from your pay that would have gone to the government as tax instead lands in your pension. You get the benefit.

An example

  Before 6 April 2019 From 6 April 2019
Your salary 30,000 30,000
Total minimum pension contribution by employer and you 5% 8%
Your employer puts in 2%
600/year (or 50/month)
900/year (or 75/month)
You put in the rest from your salary before paying tax 3%
900/year (or 75/month)
1,500/year (or 125/month)
Also the government puts in 20% of your contribution 20%, 180/year (15/month). Or more if you’re a higher rate tax payer. 20%, 300/year (25/month). Or more if you’re a higher rate tax payer.
Total amount that goes into your pension 1,500/year 2,400/year
But because you pay for your bit with untaxed money it feels like only 720/year 1,200/year
It is a pay rise, because your employer has to put more in your pension. But the strange thing is that it might feel like a pay cut - as you’re also putting a bit more into your pension, you could have a bit less spending money in your pay packet.

So the way to think about pensions is that you’re sending money from today to future you. And how to think about these increased contribution changes: future you is going to have a more comfortable retirement.

You don’t need to do anything - your employer should've just made it happen.

(Caveats: the numbers get a bit more complicated if you salary makes you a higher rate tax payer, and the definition of “qualifying earnings” is slightly wider than just your salary. So we suggest using the Money Advice calculator for a more accurate view. Also: if you’ve opted out of your employer pension, these changes shouldn’t affect you. As ever, if you’re unsure, or you think your situation is complicated, it’s best to talk to an Independent Financial Advisor.)

PS: Savings

With the next tax year in April came a new ISA allowance, and ISAs are a great way to save because (just like workplace pensions) they’re tax efficient. However much money you have in an ISA, you'll never pay tax on the interest, dividends or any increase in value when you sell them in future.

Previously on Checksies

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Small print

We’re not independent financial advisors, so this isn’t financial or investment advice. Before spending money on financial products, you should talk to an Independent Financial Advisor. The ones you want are qualified as “Chartered Financial Planners”, and you can find one here. We’re in the UK, which means we don’t understand anything about advice, money or tax in other countries. We have biases. We hold shares in whatever Vanguard thinks is appropriate. We may also hold shares in individual companies, for instance our employers. We’re trying to work out what’s best to do, just like you are. Look after each other everyone.

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