Good news – by law, the minimum amount that must be paid into an employee’s pension has gone up. And it’ll be going up again in April 2019. So employers need to make sure they’re remaining compliant and paying the correct contribution amount.
What does ‘increase to minimum contributions’ mean?
When an employee is automatically enrolled into a pension (like The People’s Pension), by law there are set minimum contribution levels.
The total minimum contribution went up on 6 April 2018.
This means the total minimum amount the employer pays into a pension pot, and the amount of money the government puts in (known as tax relief) based on the employee’s part of the total minimum contribution, just got bigger.
This is great news as it means employees will be getting even more out of their workplace pension.
Benefits for pension members
If you stop your contributions your employer may also stop paying in too.
This increase means even more is added to your pension pot from your employer and the government – through basic rate tax relief (higher rate tax payers may have to claim the rest from HM Revenue & Customs). Think of it as an even bigger helping hand to help you save for the lifestyle you want during retirement.
All contributions are paid into a pension account in your name, so remember it’s yours to keep.
These contributions are invested. When you retire, the value of your account is used to provide retirement benefits for you and, if you wish, your dependants.
For example, using basic rate tax relief (higher rate tax payers will get more), here’s how contributions could change if you’re currently paying £24 per month:
- Contributions now – you pay £24 in, then your employer and the government will add in a total of £26 extra free money to your pension pot each month.
- Contributions after 6 April 2019 – you pay £40 in, then your employer and the government will add in a total of £40 extra free money to your pension pot each month.
This is a very effective way to save so don’t lose it! If you don’t maintain the total minimum contributions levels, your employer does not have to pay their minimum contributions levels (although you would still get tax relief – the government contribution – topping up the amount you save).
How you’ll receive tax relief depends on how your contributions are taken from your pay – before or after tax.
What happens next?
The next increase will happen on 6 April 2019. Your employer may write to you to tell you about the change before it happens.
You won’t need to do anything – your company payroll will make the changes for you.
The best news is that the increase in contributions should mean you have more money put aside in your pension pot for when you retire.
How much you pay now, and in the future
Employees and employers both pay more as a minimum, into members’ workplace pensions – which means members also get more tax relief on their pension contributions.
The table below shows how the levels of contributions would look if the employer pays the minimum contribution, and if they calculate the minimum pension contributions on qualifying earnings. These percentages can vary if an employer calculates contributions using different elements of pay. You can find out more about calculating pension contributions on The Pensions Regulator website.
|Employer minimum contribution||Employee contribution||Tax relief on employee contribution||Total minimum contribution|
|6 April 2018 – 5 April 2019||2%||2.4%||0.6%||5%|
|6 April 2019 onwards||3%||4%||1%||8%|
How much should you be saving for retirement?
As a pension member, you’ve probably wondered how much you should save into your pension – so that you have enough to live on when you retire.
The contribution increases are designed to help you save more – but what’s the right amount for you personally?
You can use our calculators to help check how much you’re likely to need in retirement, and therefore how much you need to save now…
Paying more than the minimum contribution
If you want to, you can pay more than the minimum into your pension pot by making additional contributions.
What employers (and their advisers) need to do
Action should have been taken before the start of the pay period that includes the 6 April 2018 – to make sure employers are remaining compliant and paying the correct contribution amount.
If they haven’t already done so, the employer or their adviser will need to log in to Online Services, where there will be alerts to tell you what you need to do depending on how the account is set up.
If the employer and their employees already pay the new legal minimums, you’ll just need to prepare for the next increase on 6 April 2019…
- 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 employers must contribute at least 3% of qualifying earnings whilst their employees make up the difference of 5%).
It’s important for employers to note the next date to help them plan ahead. Their company payroll will need to be aware so they can make any necessary adjustments, as will their IT department if they have bespoke payroll software.
Remember – employers have a legal obligation to meet the new minimum contributions. If they don’t, we may report to The Pensions Regulator, as we have a duty to monitor contributions.
An important note about contractual enrolment
If employees have become members of their pension scheme through contractual enrolment, you may need their 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.
Helpful resources for employers and advisers
We’ve created a guide about the increases to minimum contributions, to help employers understand what’s required.
Tools to help employers tell employees about the change
Although there are no additional duties under automatic enrolment for employers to tell employees about the increase to contributions, they may wish to do so. This will help minimise queries and reduce the risk of some employees deciding to leave their pension scheme.
We’ve made it easier for employers to communicate the changes to their employees – by creating some handy template letters about the increase to minimum contributions.
You can download the template letters from our communications toolkit and adapt them to fit your own needs.
There, you’ll find also helpful material like:
- Simple wording to put on employee payslips explaining the change
- Posters to raise awareness in your workplace
Where to find out more about minimum contribution increases
If you have any questions, it’s worth checking our knowledge base first, where you’ll find answers to all our most frequent questions.
Email us at firstname.lastname@example.org