Many large UK employers have worked with pension schemes for a significant amount of time. These days though, traditional final salary schemes have mainly been closed with benefits preserved and replaced by what are termed ‘defined contribution’ plans. In this instance, staff pensions are based not on their own earnings but on the total pot of money that has been saved and invested.
Some schemes operate tax relief under the Net Pay Arrangement (in other words, tax is accounted for on the net of gross, minus the pension contribution). Another approach is Relief At Source. In this instance, pension tax relief is not available, but Her Majesty’s Revenue & Customs makes a +25% payment to the pension scheme directly.
However, UK Chancellor of the Exchequer Philip Hammond has indicated that the government plans to review the current pension tax relief situation.
A new legal requirement for employers to automatically enrol all staff into a workplace pension scheme was also introduced in October 2012 and subsequently rolled out among organisations of all sizes. Auto-enrolment (AE) pensions are subject to banded thresholds, which usually increase annually.
As of 6 April 2019 though, the minimum legal contributions for AE workplace schemes will increase, under a process that is sometimes referred to as ‘phasing’.
It is employers themselves, along with their pension scheme providers, that are responsible for ensuring all contributions meet these new legal set minimums. Please note that such contributions are not set by the government - although it does set legal minimums - or by payroll software and service suppliers.
This means that different employers tend to operate different rates for different schemes. As a result, The Pension Regulator (TPR) has made it clear that it is employers’ and their chosen pension schemes’ “responsibility to make sure these increases are implemented”.
New minimum contributions
Put another way, all employers whose current scheme rule contributions do not already meet the increased minimum must take action to ensure that at least the minimum amounts are being paid into their pension scheme. If the new minimum is already being exceeded or a defined benefit pension provided, no action is necessary.
Pension scheme contributions vary from employer to employer depending on the type and rules of the scheme as outlined in the documentation held by both the company and their pension provider.
Since April 2018, the overall minimum contribution has stood at 5%, with a minimum employer contribution of 2%. These contribution minimums applied to ‘qualified’ earnings in the range of £6,032 (US$7,823) and £46,350 (US$60,113) per annum.
But as of 6 April 2019, employers will be required to pay a minimum 3% share of the overall legal minimum of 8%. If they already pay more than 3%, any subsequent gap would have to be made up by the employee concerned.
There are also three alternate sets of minimum contributions for employer schemes that do not use the AE banded earnings principle, which is referred to as Set 1, 2 and 3.
Set 1 is used if pensionable pay of £1 (US$1.30) or more does not include elements such as a bonus, overtime, commission and other allowances that would form part of qualifying earnings.
Set 2 applies when pensionable pay of £1 or more is at least 85% of qualifying earnings.
Set 3 is employed where pensionable pay includes all earnings of £1 or more.
So minimum contributions from 6 April 2019 comprise:
|
|
Overall minimum |
Employer minimum |
|
Banded earnings |
8% |
3% |
|
Set 1 |
9% |
4% |
|
Set 2 |
8% |
3% |
|
Set 3 |
7% |
3% |
Employers will need to decide:
- Whether their contribution rates already meet the relevant criteria;
- At what point (1 October or 6 April) any increase applies to their scheme for each relevant year;
- What rates need to be applied for employers to meet any revised minimum criteria;
- What rates (if any) need to be applied to ensure employees contribute any additional amounts required to reach the overall minimum or higher (if scheme rules allow);
- How payroll (or system calculating contributions) control parameters should be changed to apply the revised rates at the correct time.
Employers should inform their staff of the pending contribution increases, and TPR provides a sample letter template that can be tailored to this end. But depending on what has been agreed with your pension scheme provider, it may be necessary for them to write to your staff themselves or for you to use their letter templates.
Do not expect your payroll software or service provider to apply any automatic upgrades to deal with the situation. You will need to set revised contribution rates, write documentation and notify them of any changes that need to be made.
So in summary: Investigate, plan and budget. Define, communicate and apply your pension AE contribution rate revisions at the applicable time.
Remember, as an employer, it is your legal duty to ensure that any minimum contribution requirements have been reviewed and implemented. Failure to do so can result in fines.
Simon Parsons is director of payment, benefits and compliance strategies at HR and payroll services provider, SD Worx. He is also involved in a number of HMRC and government consultative groups and committees. As a fellow of the Chartered Institute of Payroll Professionals and one of the original Masters of Science in Payroll Management, Simon is also a regular author and speaker on payroll matters.
OTHER ARTICLES THAT MAY INTEREST YOU
NEST trials new UK pension savings model
UK pension freedoms: What employers need to know
UK employers cut pension deficits in half
Many large UK employers have worked with pension schemes for a significant amount of time. These days though, traditional final salary schemes have mainly been closed with benefits preserved and replaced by what are termed ‘defined contribution’ plans. In this instance, staff pensions are based not on their own earnings but on the total pot of money that has been saved and invested.
Some schemes operate tax relief under the Net Pay Arrangement (in other words, tax is accounted for on the net of gross, minus the pension contribution). Another approach is Relief At Source. In this instance, pension tax relief is not available, but Her Majesty’s Revenue & Customs makes a +25% payment to the pension scheme directly.
However, UK Chancellor of the Exchequer Philip Hammond has indicated that the government plans to review the current pension tax relief situation.
A new legal requirement for employers to automatically enrol all staff into a workplace pension scheme was also introduced in October 2012 and subsequently rolled out among organisations of all sizes. Auto-enrolment (AE) pensions are subject to banded thresholds, which usually increase annually.
As of 6 April 2019 though, the minimum legal contributions for AE workplace schemes will increase, under a process that is sometimes referred to as ‘phasing’.
It is employers themselves, along with their pension scheme providers, that are responsible for ensuring all contributions meet these new legal set minimums. Please note that such contributions are not set by the government - although it does set legal minimums - or by payroll software and service suppliers.
This means that different employers tend to operate different rates for different schemes. As a result, The Pension Regulator (TPR) has made it clear that it is employers’ and their chosen pension schemes’ “responsibility to make sure these increases are implemented”.
New minimum contributions
Put another way, all employers whose current scheme rule contributions do not already meet the increased minimum must take action to ensure that at least the minimum amounts are being paid into their pension scheme. If the new minimum is already being exceeded or a defined benefit pension provided, no action is necessary.
Pension scheme contributions vary from employer to employer depending on the type and rules of the scheme as outlined in the documentation held by both the company and their pension provider.
Since April 2018, the overall minimum contribution has stood at 5%, with a minimum employer contribution of 2%. These contribution minimums applied to ‘qualified’ earnings in the range of £6,032 (US$7,823) and £46,350 (US$60,113) per annum.
But as of 6 April 2019, employers will be required to pay a minimum 3% share of the overall legal minimum of 8%. If they already pay more than 3%, any subsequent gap would have to be made up by the employee concerned.
There are also three alternate sets of minimum contributions for employer schemes that do not use the AE banded earnings principle, which is referred to as Set 1, 2 and 3.
Set 1 is used if pensionable pay of £1 (US$1.30) or more does not include elements such as a bonus, overtime, commission and other allowances that would form part of qualifying earnings.
Set 2 applies when pensionable pay of £1 or more is at least 85% of qualifying earnings.
Set 3 is employed where pensionable pay includes all earnings of £1 or more.
So minimum contributions from 6 April 2019 comprise:
|
|
Overall minimum |
Employer minimum |
|
Banded earnings |
8% |
3% |
|
Set 1 |
9% |
4% |
|
Set 2 |
8% |
3% |
|
Set 3 |
7% |
3% |
Employers will need to decide:
- Whether their contribution rates already meet the relevant criteria;
- At what point (1 October or 6 April) any increase applies to their scheme for each relevant year;
- What rates need to be applied for employers to meet any revised minimum criteria;
- What rates (if any) need to be applied to ensure employees contribute any additional amounts required to reach the overall minimum or higher (if scheme rules allow);
- How payroll (or system calculating contributions) control parameters should be changed to apply the revised rates at the correct time.
Employers should inform their staff of the pending contribution increases, and TPR provides a sample letter template that can be tailored to this end. But depending on what has been agreed with your pension scheme provider, it may be necessary for them to write to your staff themselves or for you to use their letter templates.
Do not expect your payroll software or service provider to apply any automatic upgrades to deal with the situation. You will need to set revised contribution rates, write documentation and notify them of any changes that need to be made.
So in summary: Investigate, plan and budget. Define, communicate and apply your pension AE contribution rate revisions at the applicable time.
Remember, as an employer, it is your legal duty to ensure that any minimum contribution requirements have been reviewed and implemented. Failure to do so can result in fines.
Simon Parsons is director of payment, benefits and compliance strategies at HR and payroll services provider, SD Worx. He is also involved in a number of HMRC and government consultative groups and committees. As a fellow of the Chartered Institute of Payroll Professionals and one of the original Masters of Science in Payroll Management, Simon is also a regular author and speaker on payroll matters.
OTHER ARTICLES THAT MAY INTEREST YOU
NEST trials new UK pension savings model
UK pension freedoms: What employers need to know
UK employers cut pension deficits in half
