April 2019 heralds new rates for the pension contributions that employers and employees will pay into workplace pension schemes on a monthly basis. Overall contributions will rise from 5% to 8%, with the minimum employer contribution going from 2% to 3% whilst the minimum employee contribution will rise from 3% to 5%.
This means that if, for example, an employee is earning £30,000, they will take around £253 less home annually. However, the employer will also pay more into the pension scheme, meaning that the contribution increase offers a sort of ‘hidden payrise’, with workers’ overall income rising due to the legislation. As an employer, you may choose to pay more into the scheme, lessening the percentage that the employee is expected to cover. This is at your discretion, but studies have found that incentives such as this are a great way to build employee job satisfaction and loyalty to the company.
Currently, workplace pension scheme enrolment is automatic for people over the age of 22 and earning more that £10,000 in a single job, so this move looks set to affect more than 10 million employees across the UK.
How do auto-enrolment pensions work?
Starting out in 2012, the auto-enrolment pension scheme is a Government initiative designed to test ‘push economics theory’. This theory states that people in general tend to default to the easiest option available. If the system is set up so that the simplest thing to do is conform to the ‘correct’ option, you will find that more people do so. In this case, it is more difficult to opt out of the pension scheme and the easiest thing to do is to contribute. The pension is held by a pension company or scheme and employees are not able to access it until they reach retirement age, making for a much higher percentage of employed people saving for the future.
Latest figures indicate success with this scheme, with pension scheme participation rates rising by 44% since its inception. Pre-2012, less than one in six workers were doing any sort of saving for retirement, whereas now this number is around seven in 10.
It is down to you as the employer to enrol every member of your staff into the pension scheme, once they are over 22 and have earned more than £10,000 with your business. Once enrolled, this money will be taken directly from the employee’s take-home pay and continues to roll on month by month until they reach retirement age or leave the company.
If the employee wishes to opt out then they are legally allowed to, but will have to request this from you and will be automatically enrolled again every 3 to 5 years. The employee needs to keep track of this themselves so that they can opt out again when they are automatically enrolled. You don’t need to remind employees about auto-enrolment or keep track of who wants to join the pension scheme and who doesn’t.
If an employee does decide to opt out, any money that they have already paid into a pension scheme will remain there until they reach retirement age, unless they choose to opt out within the month.
What is the Government’s contribution?
The Government also makes a contribution to the pension fund as a reward for paying into a pension scheme, in the form of tax relief on workers’ pension contributions.
Tax relief is essentially a refund of tax that has already been paid, which is put into the employee’s pension at their usual rate of income tax. This may be 20%, 40% or 45%.
Put more simply, this means that a basic-rate taxpayer will only pay £80 into their pension to have £100 added to the pot. A higher rate taxpayer will put in only £60 whilst the top-rate taxpayers put in £55.
Who won't be automatically enrolled?
Not everyone is automatically enrolled, although they can still choose to enrol voluntarily, if they do decide that they want to join the pension scheme.
You don’t have to enrol an employee automatically if:
- They have given notice, or have been given notice by you, that they are going to leave your employment
- They have a different pension arranged through your business
- They are from another EU member state and are part of an EU cross-border pension scheme
- They opted out of a pension arranged through your company more than one year before your auto-enrolment start date
- They have taken a lump sum payment from a pension scheme that has closed and then left and re-joined your company in the same job within a year of getting this payment.
Why might employees want to opt out?
There are lots of reasons that people might want to choose to opt out of their workplace pension scheme, and this is absolutely legal and simple enough to do.
Before an employee decides to opt out it is worth mentioning the benefits that come with joining a workplace pension scheme. Although they do lose a small amount of their pay each month, this adds up quickly in the scheme of things and makes for a solid foundation for their retirement plan. It also acts as a sort of pay rise as you will be paying into it as well, and they will receive tax benefits that they otherwise wouldn’t if they were not part of a pension scheme.
You might encourage your employees to opt out for the following reasons:
Paying back debts that are causing them excessive financial difficulty. It is always wisest to clear debt before paying into savings or pensions schemes, as the interest accrued on debt is more detrimental to financial status than not having a pension set up.
If they already have a valuable pension plan, wherein auto-enrolment could put them over the lifetime allowance (currently standing at £1,055,000). In some cases, going over this amount will result in paying more tax and thus leaving the employee with less to retire on than they would have if they left their pension fund as it is.
If they are nearing retirement age and have very low savings. In this case a small amount added to a retirement scheme is unlikely to offer any real benefit.
Talk to TFMC about pensions today
Workplace pensions are best tackled by having a comprehensive approach to PAYE management, so that calculating the appropriate figures is integrated into your existing payroll solution. Why not speak to TFMC’s helpful advice team today to find out how we can assist you in this respect. Call us on 0800 470 4820 or email [email protected].