Workplace pension contributions

How do pension contributions work?

Payments made into a pension are called contributions.

When an employer automatically enrols an employee into a pension (like The People’s Pension), by law there are set minimum contribution levels.

These contributions are completely separate from the State Pension which, at £10,600.20 a year or £203.85 per week currently (based on someone reaching State Pension age on or after 6 April 2016 with 35 qualifying years on their National Insurance record), is likely to need topping up for most to enjoy a more comfortable retirement.

Benefits of paying into your pension pot

Here are some benefits of a workplace pension:

• Your workplace pension gives you your own pension that belongs to you – even if you leave your job in the future, it’s yours to keep.
• Each pay period when you pay into it, your employer usually does too and the government lets you hold on to some of your tax to help you build a bigger pot. That’s free ‘extra’ money, meaning more saved towards a more comfortable retirement. Here’s an example¹ if you were paying in contributions of £40 per month:

• Your workplace pension pot is completely separate from the State Pension, and a good way to top up your retirement income.
• The return on your pension savings is likely to be better than from any savings in your bank account. So it’s wise to start saving now to give your money a better chance to grow!
• If you stop your contributions your employer may stop paying in too. So, don’t lose out.

¹ The example in the table above shows what happens when contributions are made after tax, and tax relief is claimed for you. Higher rate and additional taxpayers may need to claim further tax relief through their tax returns. The calculation will differ where contributions are made before tax has been taken and tax relief is received automatically. Find out more about tax relief

Check what’s in your pension pot

You’ll receive an annual statement in your Online Account showing the value that you hold in The People’s Pension.

But you can check, any time, how much is in your pot by logging in to your Online Account. This will help you keep track of how your investments are doing and give you an idea how much you might have when you retire.

Check how much you need to save for retirement

Did you know? Research from MoneyHelper shows that the maximum State Pension is far below what most people hope to retire on. The State Pension is currently around £203.85² a week – could you manage on that alone?

• Use our retirement planner to work out if you’re on track to live the retirement you want. It shows you how much money you may need and could have in retirement. Find the planner in your account.
• Our life expectancy calculator can give you an idea of how long your pension savings will need to last.

² The State Pension amount of £203.85 a week is based on someone reaching State Pension age on or after 6 April 2016 with 35 qualifying years on their National Insurance record. Find out more about different types of pension

Regularly pay more into your pension

Small increases in money going into your pension pot can lead to big improvements later in life. If you can afford to, you should think about saving more.

The more you pay in the more tax relief you may receive, so you could have a larger pot for later life. Plus:

• the return on your pension savings is likely to be better than from any savings in your bank account
• once you’ve saved over £3,000, you’ll benefit from the rebate on our management charge
• your pension pot is completely separate from the State Pension
• your pension belongs to you – even if you leave your job in the future, it’s your money for life.

How to regularly add extra money to your pension savings

1. Directly from your pay packet

This is the easiest way to save more. Talk to your employer to see if they can set up the extra payments on your behalf. You never know, your employer may top up their contributions too! Tax relief will be added to your pot in the same way it is now.

2. Directly with us by Direct Debit into your pension

If you change jobs, you can continue saving with us. We’ll claim tax relief at the basic rate on your behalf and add it to your pot. If you’re a higher rate taxpayer you can claim the rest in your tax return.

There are 2 forms to fill in and return to us – we’ll then be in touch to confirm we’ve set up your Direct Debit:

Direct Debit mandate form

Personal pension contributions form

Remember – you can always reduce the amount you pay if things change and you don’t have enough spare cash each month.

Please note – maximum pension contributions

Under HM Revenue & Customs (HMRC) rules there is a limit on the total amount you can save each tax year into all registered pension schemes and the tax relief you receive on your contributions. The maximum is 100% of your relevant UK earnings (up to the annual allowance) or £3,600 gross, whichever is higher.

The annual allowance limit for the current tax year is £60,000. This limit includes all your contributions, tax relief and employer contributions across all your pension arrangements. If you go over this limit, this will result in a tax charge, known as the annual allowance charge. In some cases you can carry forward any unused annual allowance from the previous 3 tax years.

Discover more about tax relief

Add a one-off payment into your pension

You have the option to add to your pension pot by making one-off contributions as and when you have any spare money.

Maybe you’ve received a work bonus or an inheritance – it’s good to consider investing it into your pension pot, regardless of how long you’ve got until retirement. Plus:

• the more you pay in the more tax relief you may receive and the more money you could have later on in life
• the return on your pension savings is likely to be better than from any savings in your bank account
• once you’ve saved over £3,000, you’ll benefit from the rebate on our management charge
• your pension pot is completely separate from the State Pension
• your pension belongs to you – even if you leave your job in the future, it’s your money for life.

How to easily make a one-off payment into your pension

You can do this through your online banking (sometimes known as BACS). We’ll claim tax relief at the basic rate of 20% on your behalf and add it to your pension pot. If you’re a higher rate taxpayer you can claim the rest in your tax return.

There’s 1 form to fill in and return to us – we’ll then be in touch with more information on how you can send us your personal contributions by BACS:

Personal pension contributions form

Please note – maximum pension contributions

Under HM Revenue & Customs (HMRC) rules there’s a limit on the total amount you can save each tax year into all registered pension schemes and the tax relief you receive on your contributions. The maximum is 100% of your relevant UK earnings (up to the annual allowance) or £3,600 before tax, whichever is higher.

The annual allowance limit for the current tax year is £60,000. This limit includes all your contributions, tax relief and employer contributions across all your pension arrangements. If you go over this limit, this will result in a tax charge, known as the annual allowance charge. In some cases, you can carry forward any unused annual allowance from the previous 3 tax years.

Discover more about tax relief

Employer pension contributions

As an employer, you’re required to contribute set minimum amounts to your employees’ pension pots on a regular basis in most cases, from the date your auto-enrolment duties start. So how much do you need to pay currently?

How much do you need to pay?

The level of contributions that needs to be paid is usually⁴ based on your employees’ qualifying earnings.

You don’t pay anything on the first £6,240 they earn a year, or on anything they earn above £50,270 a year. What you do pay is at least 3% of any earnings in between those two figures.

So, if they earn £16,240 a year, you have to pay at least 3% of £10,000. These payments are known as ‘contributions’ and a minimum contribution amount is set by the government each year.

⁴ Some employers use a different earnings basis though – such as pensionable earnings or total earnings.

Minimum pension contributions

As an employer, you have to make the ‘Employer minimum contribution’ shown below, and then the total contribution is reached by adding the employee’s contribution (deducted from their earnings) and tax relief from the government.

However, if you wish you can choose to pay the full amount yourself, so your employees don’t have to.

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 Pension Regulator website.

Tax and pension contributions

To help employees save for retirement, the government usually provides tax relief on the contributions they pay into their pension savings.

Tax relief is available on an employee’s pension savings up to a standard limit known as the annual allowance, but their exact annual allowance depends on how much they earn.

Employers need to check that they’ve applied the same tax relief settings to their employees’ pension contributions on their payroll and on their pension scheme. 

More about tax relief

Your pension contribution options with The People’s Pension

There are two ways you can sign up for The People’s Pension, which have different approaches to paying into employee pension pots.

If you’re new to employer pension duties, find out more about getting set up with The People’s Pension.