GOVERNMENT plans to remove the lower-earnings limit for being automatically enrolled into a workplace pension are likely to negatively impact on half a million lower earners who are already struggling with wage stagnation.

At present, anyone earning at least £10,000 will be automatically enrolled into a pension scheme, although contributions are based only on earnings of between £5,876 and £45,000.

However, the Government has said that in addition to bringing teenagers into auto-enrolment by reducing the minimum age at which it kicks in from 22 to 18 it will begin calculating contributions the moment employees start earning. The £10,000 trigger will remain in place.

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The proposals were revealed in a long-awaited review into auto-enrolment published last weekend. They require an act of parliament and, if passed, would come into force in the mid-2020s.

Advocates of auto-enrolment say it is an unusually successful pensions policy and an example of “nudge theory” being used to boost saving among workers. The number of employees saving for their retirement has risen by around five million since auto-enrolment was first introduced in 2012.

However, pension experts have pointed out that by including younger earners – who are typically lower earners - in the scheme at least 500,000 people will lose out on much-needed pay without getting the pension tax benefits that higher earners enjoy.

That is because the majority of non-taxpayers who will be enrolled in net-pay pension schemes will have to fund the full contribution themselves without receiving 20 per cent tax relief or other tax benefits such as salary sacrifice.

Low earners can normally contribute up to £3,600 a year into a pension so they can receive 20 per cent tax relief, but this option is only available in workplace schemes that deduct contributions at source. Employees usually have no say in the system chosen by your employer.

Henry Tapper, campaigner and director of Pension PlayPen, described the arrangement as “absurd and unfair”.

“A high proportion of those auto-enrolled with earnings in the £8,000 to £12,000 range are contributing to workplace pensions without getting the promised government incentive, equivalent to tax-relief,” he said.

“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 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.

There are also age differences in the statutory minimum wage to consider. From next April, workers aged between 18 and 21 will be entitled to at least £5.90 an hour, going up to £7.38 if they are aged between 21 to 24 and £7.83 if they are 25 and over.

However, there is a silver lining for those entitled to in-work benefits. If you are claiming the new Universal Credit, all your pension contributions are disregarded when your income is next assessed, compared to half of your contributions under the old system.

Iona Bain will be presenting a special programme on financial education for young people on BBC Radio 4’s Moneybox at 12 noon today.