Ask the Expert: Impact of minimum percentages increase on UK DC pensions Ask the Expert: Impact of minimum percentages increase on UK DC pensions

Ask the Expert: Impact of minimum percentages increase on UK DC pensions
25 Feb 2018

Q. We have a defined contributions pension scheme for auto-enrolment and, as far as I understand, minimum percentages increase in April 2018. Could you point out any guidance to help me deal with this issue?

 

A. Thank you for highlighting this situation - it is always useful to have a reminder at the start of the new calendar year. Coincidentally, as I received your question, I was also sent another about how best to prepare for the increases, which I will address in my next article.

Yes, contribution increases are happening in April, but in the first instance, it is important to look at the type of defined contributions (DC) pension scheme you already have in place. It could be:

Qualifying earnings

This scheme bases pension contributions on the amount of qualifying earnings available – that is, those qualifying earnings that are classed as the pensionable pay. Take a look at paragraph 49 of The Pensions Regulator’s (TPR) Detailed Guidance booklet 4. It is a must-read for employers and agents and provides a definition of these earnings to help you establish if your scheme is operating on this basis.

The law currently says that the total minimum contributions for this type of scheme must total 2% of qualifying earnings, of which employers must pay 1%. Usually, employees and employers both contribute so the total minimum contribution requirement is met if they both pay 1%.

On 6 April 2018, the total minimum contribution increases to 5%, and on 6 April 2019, it rises to 8% - see the following table below:

 

Effective

Total minimum contributions

Employer minimum

Worker contribution

Up to 05 April 2018

2%

1%

1%

06 April 2018 to 05 April 2019

5%

2%

3%

06 April 2019 onwards

8%

3%

5%

 

Self-certified schemes

Some employers offer pension schemes that do not have qualifying earnings as pensionable pay but instead use some other definition on which to base contributions. These schemes must meet certain criteria and employers can self-certify that they are eligible to be used for auto-enrolment – look at the Department for Work and Pensions’ (DWP) booklet on certification and paragraph 69 of the above TPR guidance to see if your scheme uses one of three possible ‘sets’ because the minimum contribution requirements are different for each one:

Set 1

This set sees contributions calculated based on ‘gross earnings’ – see paragraph 72 of the TPR's guidance booklet for what this means. Minimum contributions can be expressed as follows:

Effective

Total minimum contributions

Employer minimum

Worker contribution

Up to 05 April 2018

3%

2%

1%

06 April 2018 to 05 April 2019

6%

3%

3%

06 April 2019 onwards

9%

4%

5%

 

Set 2

This set is more complicated. Contributions are again calculated based on ‘gross earnings’ (see paragraph 72) which, on average, amount to at least 85% of the workforce’s total earnings (also see page 11 of the DWP guidance). Minimum contributions can be expressed as follows:

 

Effective

Total minimum contributions

Employer minimum

Worker contribution

Up to 05 April 2018

2%

1%

1%

06 April 2018 to 05 April 2019

5%

2%

3%

06 April 2019 onwards

8%

3%

5%

 

Set 3

Here contributions are calculated on all earnings, not just ‘gross earnings’. The minimum contributions can be expressed as follows:

 

Effective

Total minimum contributions

Employer minimum

Worker contribution

Up to 05 April 2018

2%

1%

1%

06 April 2018 to 05 April 2019

5%

2%

3%

06 April 2019 onwards

7%

3%

4%

 

My advice in the first instance though is to check your pension scheme. For guidance on phasing, which includes the above minimum percentages, also see TPR’s dedicated webpage on the matter.

 

Ian Holloway

Ian Holloway is head of legislation and compliance at Cintra HR and Payroll Services. He has been in the payroll profession for over 30 years, processing payrolls large and small from organisations across all sectors until 2011 when he started helping to educate the profession by means of course material, newsletters and face-to-face presentations.

 

 

 

Q. We have a defined contributions pension scheme for auto-enrolment and, as far as I understand, minimum percentages increase in April 2018. Could you point out any guidance to help me deal with this issue?

 

A. Thank you for highlighting this situation - it is always useful to have a reminder at the start of the new calendar year. Coincidentally, as I received your question, I was also sent another about how best to prepare for the increases, which I will address in my next article.

Yes, contribution increases are happening in April, but in the first instance, it is important to look at the type of defined contributions (DC) pension scheme you already have in place. It could be:

Qualifying earnings

This scheme bases pension contributions on the amount of qualifying earnings available – that is, those qualifying earnings that are classed as the pensionable pay. Take a look at paragraph 49 of The Pensions Regulator’s (TPR) Detailed Guidance booklet 4. It is a must-read for employers and agents and provides a definition of these earnings to help you establish if your scheme is operating on this basis.

The law currently says that the total minimum contributions for this type of scheme must total 2% of qualifying earnings, of which employers must pay 1%. Usually, employees and employers both contribute so the total minimum contribution requirement is met if they both pay 1%.

On 6 April 2018, the total minimum contribution increases to 5%, and on 6 April 2019, it rises to 8% - see the following table below:

 

Effective

Total minimum contributions

Employer minimum

Worker contribution

Up to 05 April 2018

2%

1%

1%

06 April 2018 to 05 April 2019

5%

2%

3%

06 April 2019 onwards

8%

3%

5%

 

Self-certified schemes

Some employers offer pension schemes that do not have qualifying earnings as pensionable pay but instead use some other definition on which to base contributions. These schemes must meet certain criteria and employers can self-certify that they are eligible to be used for auto-enrolment – look at the Department for Work and Pensions’ (DWP) booklet on certification and paragraph 69 of the above TPR guidance to see if your scheme uses one of three possible ‘sets’ because the minimum contribution requirements are different for each one:

Set 1

This set sees contributions calculated based on ‘gross earnings’ – see paragraph 72 of the TPR's guidance booklet for what this means. Minimum contributions can be expressed as follows:

Effective

Total minimum contributions

Employer minimum

Worker contribution

Up to 05 April 2018

3%

2%

1%

06 April 2018 to 05 April 2019

6%

3%

3%

06 April 2019 onwards

9%

4%

5%

 

Set 2

This set is more complicated. Contributions are again calculated based on ‘gross earnings’ (see paragraph 72) which, on average, amount to at least 85% of the workforce’s total earnings (also see page 11 of the DWP guidance). Minimum contributions can be expressed as follows:

 

Effective

Total minimum contributions

Employer minimum

Worker contribution

Up to 05 April 2018

2%

1%

1%

06 April 2018 to 05 April 2019

5%

2%

3%

06 April 2019 onwards

8%

3%

5%

 

Set 3

Here contributions are calculated on all earnings, not just ‘gross earnings’. The minimum contributions can be expressed as follows:

 

Effective

Total minimum contributions

Employer minimum

Worker contribution

Up to 05 April 2018

2%

1%

1%

06 April 2018 to 05 April 2019

5%

2%

3%

06 April 2019 onwards

7%

3%

4%

 

My advice in the first instance though is to check your pension scheme. For guidance on phasing, which includes the above minimum percentages, also see TPR’s dedicated webpage on the matter.

 

Ian Holloway

Ian Holloway is head of legislation and compliance at Cintra HR and Payroll Services. He has been in the payroll profession for over 30 years, processing payrolls large and small from organisations across all sectors until 2011 when he started helping to educate the profession by means of course material, newsletters and face-to-face presentations.