Auto Enrolment Pension Rates

First introduced in 2012 and rolled out to all businesses over the following six years, workplace pensions have changed the way in which employers provided their staff with the opportunity to save for their pensions.

Prior to its introduction, employers were not obliged to offer a scheme and, if they did, their employees had to opt into the scheme.

The goal of the auto enrolment policy was to increase the number of people saving for their retirement because the Government was concerned about its future ability to provide state pensions at their current levels to everyone because of the fast-aging population.

As of 2019, there are now 10 million employees who have been automatically enrolled into a workplace pension scheme with less than 1 million of them choosing to opt out.

Now, all employers have to offer a workplace pension scheme to their employees and most do so using the auto enrolment system. Click here for the Pension Regulator’s guide on how to set up a pension scheme for your company and how to find a provider to run it for you.

Who is entitled to a workplace pension?

Once your workplace pension scheme is set up, you must then enroll each member of staff into the scheme who fits the following criteria:

• they are between the ages of 22 and the State Pension age (click here for the State Pension Age calculator for each member of staff – the State Pension Age depends on your year of birth);
• they take home at least £10,000 a year before tax; and
• normally work in the UK (including employees based in the UK but who need to travel abroad for work).

If an employee who was previously ineligible for enrolment then becomes eligible, you must enroll them and write to them informing them of their inclusion no sooner than 6 weeks of the date on which they qualify.

What is the total minimum contribution employers, employees, and the Government make into a staff member’s pension?

The overall annual minimum total contribution made to a staff member’s pension from 6 April 2019 is 8% (this is the total that you and your employee must contribute from every payment of wages) plus the Government will contribute an additional 1%.

The government’s way of contributing to the new workplace pension schemes mirrors the way they’ve been making contributions for decades to standard pension schemes. As you know, when anyone invests into their pension scheme (assuming that they’re under their lifetime limit), the government tops it up.

A basic rate tax payer only needs to contribute £80 to add £100 to their pension pot because the taxman contributes an additional £20. This does not just apply to basic rate tax payers though – for higher rate and additional rate payers, the taxman also tops their pensions up too.

If you choose, you and employee may contribute more than the minimum required. Alternatively, you as the employer could elect to pay the 8% meaning that you entirely cover your employee’s auto enrolment contributions and they suffer no cut in take-home pay.

There are four “bases” on which you can calculate both the contributions you need to make and the contribution rates of your company and its employees:

• qualify earnings;
• basic pay;
• pensionable pay; and
• total pay.

To show how your and your employees’ auto enrolment contributions change depending on which of the four options a staff member chooses, we’ll use an example of an employee with a £32,500 basic wage, £7,500 annual sales bonus paid in commission, and a £2,500 overtime bonus giving an annual salary of £42,500 a year.

Qualifying earnings contributions example

Qualifying earnings in this case refer to pre-income tax and pre-National Insurance employment income between £6,240 and £50,000 for the 2020/21 tax year.

If the employee chose this option for the 2020/21 tax year, £6,240 would have been taken from their wage of £42,500 a year leaving an amount of £36,260 on which workplace pension contributions must have been paid.

The 3% employer minimum contribution would have been £1,087.80. The employee’s auto enrolment contribution would have been 4% totaling £1,450.40. The Government would have topped this up by another 1% (£362.60).

This employee’s total minimum contribution this year from all three sources would have been £2,900.80 (or £241 per month in payments).

Basic pay contributions example

With the basic pay contributions scheme, only an employee’s basic wages are considered when calculating each party’s total minimum contributions.

Pension contributions made by you, the employer, would be 3% of £32,500 or £975.

The employee’s auto enrolment contribution would be 4% totaling £1,300 and contributions made by the government would be £325.

In total using the model, this employee would have £2,925 added to their pension pot (or £243.75 per month in payments) during this year.

Pensionable pay contributions

Using the pensionable pay measurement, at least 85% of a staff member’s total pay must count towards the amount on which minimum pension contributions are made.

For our sample employee, we could not use this method because £10,000 of their £42,500 wage is paid from overtime and bonuses and this equals around 23.5% of their total pay.

For the purposes of illustration, let’s imagine that this person’s £42,500 wage was made up of £37,500 base pay and two bonuses of £2,500 in commission for hitting sales targets and £2,500 for overtime instead.

The sales and overtime bonuses account for 11.7% of total pay under this scenario meaning that, during this year, their take home pay before additions would have qualified them for the pensionable pay method.

The minimum contribution made by you, the employer, would have been 3% of £37,500 or £1,125.

The employee’s pension scheme contribution would have been 4% totaling a minimum amount of £1,500 and the Government contribution would have been £375.

Using the pensionable pay measurement, this employee would have benefited from a total of £3,375 worth of contributions to their pension (or £281.25 per month in payments).

Total pay contributions measurement

With total pay, the contributions made by the employee, employer, and the government are based upon a percentage of the employee’s total earnings before deductions for income tax and National Insurance.

So, in this case, the minimum auto enrolment contributions would be based on the gross wage figure of £42,500.

The employer percentage contribution rate of 3% would apply meaning that you would pay in £1,275 to this employee’s pension. The employee percentage contribution rate of 4% would mean that they contribute £1,700 and the government pays £425.

Under this scheme, the minimum contribution made annually to the employee’s pension pot is £3,825 (or £318.75 in monthly payments).

Which auto enrolment scheme is the cheapest for an employer?

To save money and pay less towards your employees’ pension pots every year, the qualifying earnings scheme will be the most suitable policy in most cases.

The total pay scheme will likely be the most expensive in terms of overall contribution rate and amounts.

Auto enrolment and salary sacrifice

When your company makes payments towards your employees’ pensions, it pays no tax or National Insurance on these contributions.

Therefore, you may wish to ask your employees to agree to enter a salary sacrifice arrangement.

With a salary sacrifice agreement, your employees give up part of their salary in return for you making larger minimum contributions to their workplace pensions.

For both employee and employer, there is an opportunity to pay less on NI with a salary sacrifice scheme and, by doing this, both parties enjoy further tax relief.

You will likely have to ask each employee if they’re agreeable to a salary sacrifice scheme because, for some, it will affect their state benefits. You may have to consult a solicitor as well to find out if a salary sacrifice scheme is permissible under your staff members’ current contracts of employment.

Contact us for more information

Workplace pensions are another financial and administrative burden for business. From April 2019, employer contributions on employee pensions went up to 3% of their earnings.

For each of your employees with a workplace pension, you will be paying 16.8% in tax on top of their monthly earnings when combined with NI Employers’ Contributions.

But automatic enrolment and workplace pensions are a reality for us all. It’s not just employees who have been automatically enrolled into the scheme – employers have been automatically enrolled into it with little to no consultation.

Work with Black and White – we’ll help you set up your workplace pension scheme, find (or switch to) the right pension provider for your business, and manage your scheme month to month.

To find out more, please get in touch with us today, by contacting Black and White Chartered Certified Accountants, populating the “Got a Question” form on the right, or calling us on our helpline 0800 140 464 for confidential advice.