Proposals to increase the income tax personal allowance to £12,500 could hit pension savings by taking many low-paid workers out of auto-enrolment, a report has warned today
The CentreForum think-tank today called for the next government to prioritise increases in the threshold at which National Insurance contributions are paid in a bid to ease the squeeze in living standards.
It warned that Liberal Democrat party policy to increase the personal allowance tax threshold from £10,000 to £12,500 - so all earnings up to the National Minimum Wage are free from income tax - would hit pension saving.
Under the government's auto-enrolment scheme, workers are enrolled in workplace pensions when their earnings hit the personal allowance threshold, which will be £10,000 from April. If there were further above-inflation increases in this allowance without decoupling the auto-enrolment trigger, low-paid workers' pensions savings would therefore suffer, the Making allowances report stated.
'Increases in the personal allowance currently therefore take people not just out of income tax but also out of auto-enrolment. This will leave them and their employers better off in the short term, but harm their private pension saving.'
Adam Corlett, economics researcher at CentreForum and report author, warned that poorer households could see little benefit from future increases in the income tax personal allowance.
'It's crucial to get these expensive tax cuts right, and they should be focused as far as possible on poorer workers,' he said.
'The policy case for favouring National Insurance cuts is clear and could take the absolute poverty line out of all direct tax.'
