Increase to automatic enrolment minimum contributions
You might already be aware that minimum contributions under automatic enrolment will be going up.
When automatic enrolment was introduced, the government set:
- the minimum total contribution and minimum employer contribution to be paid into an automatic enrolment pension scheme
- how minimum contributions will increase gradually to help employers and employees spread the cost of contributions.
By law, minimum contributions will increase in two phases: 6 April 2018 and then again on 6 April 2019.
This has been known as ‘contribution phasing’. It’s important that you’re ready for the contribution increases so that the correct contributions are deducted at the right time, and that your pension scheme remains a qualifying scheme for members.
Don’t worry, you still have time to prepare
These increases were originally planned to start in October 2017 so your preparations may already be underway.
However, the date was put back a little and the phased increase will now align with the start of each tax year as well as the payroll year (this makes it easier for payroll software to manage the changes).
It’s important to start thinking about the increases and note this change in date. Your company payroll will need to be aware so they can make any necessary adjustments, as will your IT department if you have bespoke payroll software.
So what happens next?
You might want to start planning ahead for the next two minimum contribution phases. When the time comes, you’ll need to be ready to take action to ensure at least the minimum amounts are being paid in respect of your employees.
- From 6 April 2018:
The first increase will take the total minimum contribution from 2% of qualifying earnings to 5% of qualifying earnings (of which you must contribute at least 2% of qualifying earnings whilst your employees make up the difference of 3%).
- From 6 April 2019:
The second increase will take the total minimum contribution from 5% of qualifying earnings to 8% of qualifying earnings (of which you must contribute at least 3% of qualifying earnings whilst your employees make up the difference of 5%).
Before the end of the year, you should receive a letter from The Pensions Regulator to remind you about the increases to contributions. Although there are no additional duties under automatic enrolment for you to tell your employees about the increase to contributions, you may wish to do so. This will help minimise queries and reduce the risk of some employees deciding to opt out of their pension scheme.
Telling your employees about the contribution increases
To help you communicate the contribution increases to your employees, we’ll be providing template letters for you to use. And we’ll support you with other materials in the coming months, too.
How much do you need to pay currently – and what’s your commitment in the future?
How much you need to pay depends on how much each employee earns.
Qualifying earnings is the name given to a band of earnings you can use to calculate minimum contributions. For the 2017/18 tax year this is between £5,876 and £45,000 a year. So currently, you’re not required to pay anything on the first £5,876 they earn a year, or on anything they earn above £45,000 a year. The government will review the figures every year.
Until 5 April 2018 you must pay at least 1% of any earnings in-between those two figures. So, if an employee earns £15,876 a year, you have to pay at least 1% of £10,000.
From 6 April 2018 and 6 April 2019, you must make at least the ‘employer minimum contribution’ in to their pension as shown in the table below. Then the total contribution is reached by adding the employee’s contribution (deducted from their earnings) and tax relief from the government.
And, if you wish, you can choose to pay the full amount yourself (5% from 6 April 2018 and 8% from 6 April 2019) so your employees don’t have to – as an important employee benefit, this may help your recruitment efforts.
The table below is based on an employer calculating their minimum pension contributions on qualifying earnings. These percentages can vary if an employer calculates contributions using different elements of pay. The Pensions Regulator website tells you more about calculating pension contributions.
|Employer minimum contribution||Employee contribution||Tax relief on employee contribution||Total minimum contribution|
|Until 5 April 2018||1%||0.8%||0.2%||2%|
|6 April 2018 – 5 April 2019||2%||2.4%||0.6%||5%|
|6 April 2019 onwards||3%||4%||1%||8%|
This table is based on the ‘tax relief at source’ method of claiming tax relief. Read more on the two methods of tax relief.
However, if the current contributions from you and your employees already meet the minimum requirements for April 2018 and April 2019, you will not have to take any action. Although you may wish to continue to pay contributions above the minimum levels so that your employees continue to enjoy an enhanced employee benefit.
An important note about contractual enrolment
If your employees have become members of their pension scheme through contractual enrolment, you may need your employees’ consent to increase their contributions. This is only if the authority (often obtained via the terms of employment contract to deduct pension contributions from their salary) did not include the phasing of minimum contributions in April 2018 and April 2019.
Need to know more about contribution increases?
Email us at firstname.lastname@example.org
Call us on 01293 586666