This page explains the standard rules around deductions for Auto Enrolment pensions and how these will change in the future.
There is also a brief outline of some basic payroll terminology used when discussing Workplace Pensions.
Contributions:
By contributions, we mean the amount both the employee and employer will contribute to the employee’s pension pot. For many companies this may involve an increased cost for each employee enrolled into the pension. Below is the proposed contribution period (this may still change):
Up to Oct 2017:
Employer: 1%
Employee:0.8%
Employee Tax Relief:0.2%
Minimum Contributions:2%
From 1st Oct 2017:
Employer: 2%
Employee:2.4%
Employee Tax Relief:0.6%
Minimum Contributions:5%
From 1st Oct 2018:
Employer: 3%
Employee:4%
Employee Tax Relief:1%
Minimum Contributions:8%
These percentages and dates could be subject to change. Check with the Pension’s Regulator for changes to these numbers.
Note that these contributions are based on the bare minimum employer contributions, so that as long as the ‘minimum contributions’ are met, the contributions being taken are enough. For example, the minimum employer contribution up to October 2017 is 1% and the minimum total contributions are 2%, this means the employer can choose to contribute 2% and the employee contribute 0%.
- These percentages and dates could be subject to change.
- If the employee pays income tax, the government will add money to the pension in the form of tax relief. The tax relief will be shown differently depending on the pension type being used – either a ‘Net Pay Agreement’ or a ‘Relief at Source’ . If running an ‘Net Pay Agreement’ pension, the employee will see a 1% reduction on their payslip. Running a ‘Relief at Source’ pension, the employee will see the 0.8% on the payslip and the 0.2% tax relief is added by the government.
Note that these contributions are based on the bare minimum employer contributions, so that as long as the ‘Minimum Contributions’ are met, the contributions being taken are enough. For example, the minimum employer contribution up to October 2017 is 1% and the minimum total contributions are 2%, this means the employer can choose to contribute 2% the employee contribute 0%.
Terminology:
Auto Enrolment:
This is the term used to describe the changes to pensions, where companies will automatically enrol eligible jobholders into a qualifying work place pension scheme.
Workplace Pensions:
This is the pension scheme setup for your retirement that’s arranged by the employer. Both the employee and employer can contribute.
Staging Date:
This would be the date by which, companies should start enrolling eligible jobholders into a qualifying pension scheme.
Postponement:
Employers can postpone their staging date but only under certain circumstances. Postponement allows employers to avoid difficult pro-rata calculations for pension contribution deductions. It can also avoid issues relating to refunding of contributions due to people opting out in a different tax year to the one in which the deduction was made. If you are unsure about whether to use postponement, speak with the pensions regulator of your payroll software provider.
Contributions:
This is what both the employee and employer will pay into the employees’ pension pot. Qualifying Earnings: These are earnings used to identify if an employee is an eligible or non-eligible jobholder and the level of pension contributions. This includes: basic pay, wages, salary, bonuses, overtime, commission and any maternity/paternity/adoption/sick pay.
Opt-Out:
Employees who qualify for auto enrolment or who have been automatically enrolled can choose to opt-out of the pensions if they so wish.
Opt-In:
Certain employees can choose to opt-in to the pension unless they are already an active member of a qualifying pension scheme.
Net Pay Agreement and Relief at Source:
These refer to the employee tax relief on the pension.
A Net Pay Arrangement pension means the employee will see a reduction on their payslip.
A Relief at Source pension means the employee will see the smaller reduction on the payslip and another amount of tax relief is added by the government.
The Pensions Regulator:
They are the UK regulator of work based pensions. They are responsible for auditing companies ensuring that employers are compliant with auto enrolment.
Pensions Regulator Website
NEST:
The National Employment Savings Trust is a pension provider available to all employers who want to use the service. They offer a pension scheme designed for automatic enrolment that any UK employer can use to meet their new workplace pension duties, no matter what the size of the organisation.
