Many employers may have forgotten that a workplace pension which complies with the auto-enrolment rules must receive a total minimum level of contributions on behalf of each employee who is enrolled in the scheme. This level of contributions is expressed as a percentage of the employee’s pensionable pay.
The workplace pension scheme rules will define what pensionable pay is for each employee, and this can vary from scheme to scheme. Some pension schemes define pensionable pay as “qualifying earnings”, which is the pay between the NIC lower earnings and upper earnings limits: £6,032 to £46,350 for 2018/19.
The minimum total contribution from employees and employers for 2017/18 and earlier years was 2% of pensionable pay, and the employer must contribute at least 1%. The total minimum contribution for 2018/19 jumps to 5%, and the employer must contribute at least 2%, with the remainder contributed by the employee.
There is no minimum contribution level set for employees, as many workplace pension schemes operate through salary sacrifice arrangements, so the employee’s pay is reduced to compensate for the pension contributions made by the employer. From 6 April 2018 where the employer pays the minimum amount, the employee’s contribution will triple from 1% to 3% of pensionable pay.
Such an increase in pension contributions will, in many cases, cancel out the benefit from the increases in the personal allowance and NIC lower earnings threshold.
Sarah is a qualified teacher on a salary of £27,700 living in England. The increase in personal allowance gives her a tax saving of £70, and the increase in the NIC threshold saves her £18.72, a total of £88.72 for 2018/19. Sarah has not opted out of her workplace pension, and her employer contributes the minimum level, so her contribution increases from 1% to 3% of her qualifying earnings in 2018/19.
Assuming Sarah’s gross pay did not increase from 2017/18 to 2018/19, her pension contribution will increase as follows:
2017/18: 1% x (27,700 – 5,876) = £218.24
2018/19: 3% x (27,700 – 6,032) = £650.04
This is an increase in contributions of £431.80, against which she has tax and NIC savings of £88.72, so she suffers a net income loss of £343.08 in 2018/19.
You may wish to review the amount you are contributing to your staff pensions to ensure that your employees are not worse off in 2018/19. Remember an employer is not permitted to encourage an employee to opt out of the workplace pension scheme, so you must be very careful in how you communicate the changes in pension contributions to your employees.
Written by the Tax Advice Network