Next year millions will see their take-home pay fall overnight because of little-known changes to pension rules.
How much an individual loses will vary, but for someone earning £45,000 the amount will be as much as £520 a year.
It is because of scheduled changes to the Government’s flagship pension saving programme, “automatic enrolment”, that come into effect from the start of the new tax year, on April 6 2018.
Now the Chancellor has confirmed what the income tax brackets will be, it is possible to work out how far take-home pay will fall.
Since October 2012, companies have had to set up and pay into pensions on behalf of their eligible staff. That includes anyone between the age of 22 and state pension age and earning more than £10,000 a year.
While many large employers already offered generous pension perks, hundreds of thousands of smaller companies did not, leaving millions of people with little or no pension savings.
Employers currently have to add 1pc of a staff member’s salary to a pension, while individuals must save an additional 1pc. Staff can “opt out” of the scheme but to date very few have.
However, from April these minimum contributions will rise so that individuals must save 3pc of their salaries, while employers add 2pc. The Government is concerned that, despite the reforms, the country is still dramatically under-saving for retirement.
For the majority of the roughly eight million who are now saving in the auto-enrolment system, contributions are based on a “band” of their earnings, which also changes depending on tax brackets. For 2018-19 this is earnings between £6,032 and £46,350.
Analysis undertaken by consultancy Willis Towers Watson for Telegraph Money shows how much workers will see their income fall as a result of the income tax rate changes and as higher contributions come into force (see table).
The “loss” of earnings – which instead goes into the pension – peaks for someone earning up to the new starting rate of 40pc tax, so £46,350.
An employee earning £45,000 would see their take-home pay fall by £43.42 a month, or £521.04 a year. Yet, a £50,000-a-year worker would only see a £21.23 a month fall, or £254.76 annually.
The reason is twofold. Firstly, less of their earnings are in the “band” used for pension contributions. Secondly, the £1,350 rise in the higher-rate threshold from April, from £45,000, means less income tax at the higher 40pc rate is paid.
For the £50,000-a-year employee, the £21.23 cut in pay results in nearly £103 a month going into their pension, after employer contributions and tax relief. Compare this to the employee earning £45,000, who gives up £43 a month but only gets £97 in their pension, as they only get 20pc tax relief.
People whose finances are really stretched can opt out or see if their scheme will allow them to keep contributing at the current level
Aside from employee and employer contributions, pension savings are boosted by the Government in the form of tax relief. The size of the boost is based on the income tax bracket of the saver.
So a higher-rate, 40pc, payer only needs to save £60 to make a £100 pension contribution, while a basic-rate, 20pc, payer needs to put away £80 to save the same amount.
Next year’s pension contribution rise will not be the last. From April 2019, rates will increase again, to 5pc from individuals and 3pc from companies. A Government review into auto-enrolment is expected to recommend raising rates again.
David Robbins, of Willis Towers Watson, said: "Most employees are likely to stick with higher contributions: it is a big step to actively take money off your future self and hand some of it back to your employer, and many people probably suspect that they ought to be saving more.
"But this will still come as a shock to many people – they would have been told that contributions would go up in future when they were first put in a pension scheme, but that doesn’t mean they’ve kept track of this and circled a date in their calendar.
"People whose finances are really stretched can opt out or see if their scheme will allow them to keep contributing at the current level."