When the legislation was introduced, which governs workplace pensions and auto-enrolment, the government recognised that it would create new or additional costs during an already difficult period of economic uncertainty. In order to help both employers and employees manage costs, the government phased contributions with 6 April 2019 being the final date.
Pension contributions can be based on Qualifying Earnings, Basic pay or Total pay. Qualifying Earnings represent the minimum contribution requirements prescribed under the auto-enrolment legislation. Instead of considering an individual’s full earnings as pensionable, it only considers annual earnings within a certain band. This band is reviewed every tax year. For the 2018/19 tax year, annual earnings between £6,032 and £46,350 are considered as pensionable and for the 2019/20 tax year, it has been confirmed that annual earnings between £6,136 and £50,000 will be pensionable. The annual band is also pro-rated in line with the frequency that an individual is paid. As an example, in the 2018/19 tax year, earnings between £503 and £3,863 would be pensionable for a monthly paid employee.
Employers are required to contribute at least 2% of Qualifying Earnings with a total contribution (from the employer and employee) of at least 5% from 6 April 2018. The employee is required to make up any shortfall between the employer contribution and the minimum total requirement.
With effect from 6 April 2019, the employer contribution rate will increase to 3% of Qualifying Earnings and the total contribution will rise to at least 8%. Again, the employee will be required to make up any shortfall.
Similar increases will apply if you are basing pension contributions on basic or total pay although the exact percentages will vary depending on the pensionable pay basis chosen.
What happens next?
If Buzzacott is responsible for running your payroll and administering auto-enrolment, adjustments will be made to our current processes so you will not need to take any further action. If this process is being managed by a third party, they should be assisting you to implement these changes. However, we encourage you to liaise with them directly to clarify the timings and practicalities of such increases.
How can Buzzacott Financial Planning help?
We can help you communicate these contribution changes to your staff by drafting bespoke compliant communications for you to distribute. We can also provide a presentation to staff on the pension offering along with any legislative changes, which typically encourages more positive engagement with the benefits that you are offering.
The increase in employee contributions from 3% to 5% may represent a significant additional cost to staff which some employees may feel is unaffordable. Should this be the case, there are various options available to you and we would be happy to provide more details on these options.
If the contributions that you and your staff pay already exceeds the new minimum levels, no action will be required. However, you may still wish to send a communication to your staff to provide reassurance that they are unaffected by the contribution changes, as the Pension Regulator may be publicising these changes.
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