Changes to Auto Enrolment Contributions

Over the last few years automatic enrolment (auto enrolment) has been taken up in stages by existing employers, so nearly everyone has access to a workplace pension. Now it’s compulsory for every new employer to put a workplace pension in place, so the first of two planned increases to contributions come in to effect next month.

What’s changing?

The plan all along was to get every employer to provide a workplace pension, with low contribution rates to encourage adoption and minimise the impact of having to comply with these new rules.

Contributions are the amounts paid to the pension scheme, who then invest the money to (hopefully) grow to pay you out in the future. They’re a percentage of your salary and depending on scheme will include overtime and other additional payments.

Employee contributions are deducted from your salary but you get tax relief, so the government tops up your contribution.

Employer contributions are made on top of the salary etc.

 

The original minimum contributions were 2% - suggested to be 1% for both employer and employee (depending on your rate).

 

From 6th April 2018 this will rise to a total contribution of 5% - 6% for some plans, with the employer having to contribute at least 2% of that (3% of 6% plan).

 

The total minimum contributions are set by the government, with a minimum employer contribution, but the employer could choose to contribute more, all of the minimum, or make the contributions for both higher. 

 

A decent pension contribution is still an attractive benefit and shows that you’re willing to invest in your employees.

 

How will that affect me?

Some employers looked ahead and took the increases in to account, set higher contributions to start with so you might not find any difference this year.

 

This shows the effect of the two most common contribution bases:

CONTRIBUTIONS CALCULATED ON GROSS EARNINGS:

You calculate contributions based on gross earnings. You don’t include bonus, overtime, commission or certain staff allowances (such as shift pay or relocation allowance) in the calculation.

 

From the new tax year, those minimum contributions are increasing:

 

Employer min

Employee min

Total minimum contribution

Current

2%

1%

3%

Tax year 2018/19

3%

3%

6%

 

CONTRIBUTIONS CALCULATED ON TOTAL EARNINGS:

You calculate contributions based on ALL elements of staff pay AND all earnings.

 

From the new tax year, those minimum contributions are increasing:

 

Employer min

Employee min

Total minimum contribution

Current

1%

1%

2%

Tax year 2018/19

2%

3%

5%

 

What to do next

 

If you’re an employer - you need to be aware of the contribution increase and whether you’re affected.  If the total contributions on your scheme already cover the increase you’re fine.

If they don’t, you need to firstly make sure you’re meeting the minimum contributions.  Then decide if you’d like to absorb any of the employee’s increase.  Finally, you need to tell any affected employees that their/your contributions are changing and update your payroll system and pension scheme for it.  The scheme will probably highlight who’s affected so that’s a good first port of call.

 

If we don’t do your payroll already and you’d like help with working through your options we’re always here.

 

If we do take care of your payroll we should have already discussed it but get in touch if you’re unsure about anything.  If any of your employees want an idea of what the contributions will look like we can put that together for you.

 

If you’re an employee - your employer will tell you if your contributions will increase.  This means your deductions will be higher, so you may have less pay to take home, though the tax-free personal allowance is also increasing.  You should look at what this means to your budget and make sure you can afford it - your employer should be able to give you a figure.  If you think you can’t talk to your employer - they can’t give you direct advice but can give you information about your options.  You can also talk to your pension provider about your options.

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