In October 2012, the government introduced new legislation designed to tackle the funding issues that arise from an ageing population. Under the new legislation, employees are automatically enrolled into a workplace pension scheme provided that they meet certain age and earnings related criteria.
Whilst these workers are able to opt-out of the pension should they wish to do so, this new pension system is very different from the previous pension model whereby workers had to actively opt-in if they wanted to put money into a pension. The general principle behind the change is straight-forward; if the default position is reversed such that you’re a pension saver unless you say otherwise, rather than a non-saver unless you actively opt into a pension, the intention is that more people will (perhaps inadvertently) save for their retirement.
What Are The Minimum Contributions For Auto-enrolled Employees?
The legal minimum contributions are 2% of an employee’s qualifying earnings. At least 1% of this must be paid by the employer. The minimum contribution levels will increase to 8% from October 2018.
Contributions can be made at different levels, provided the minimum contributions are satisfied. Contributions to a NEST scheme should not exceed the annual limit. This limit is £4,700 for the 2015/2016 tax year.
|Date||Minimum contributions as a percentage of employee’s qualifying earnings|
|October 2012 to September 2017||2% (the employer must pay at least 1%)|
|October 2017 to September 2018||5% (the employer must pay at least 2%)|
|October 2018 onwards||8% (the employer must pay at least 3%)|
WHAT ARE 'QUALIFYING EARNINGS'?
Qualifying earnings simply means the earnings that pension contributions are calculated upon. There are three different earnings’ bases. Employers must decide which earnings base(s) to adopt and which employee(s) each earnings base applies to.
HOW ARE AGENCIES AFFECTED?
Agencies that employ and pay their workers via their own PAYE scheme must ensure they auto-enrol eligible employees into a workplace pension. Agencies engaging with umbrella companies to pay workers must ensure each umbrella company auto-enrols employees.
Agencies should confirm with every umbrella company how an employer’s pension contributions are funded. If contributions are funded from the rate paid to a worker, this should be made clear to the worker to avoid queries at a later date.
HOW ARE EMPLOYEES AFFECTED?
Employees that were not previously enrolled on an employer’s workplace pension will notice a slight reduction in their net pay as they begin make contributions. This slight reduction will, however, directly benefit the employee when they reach pension age.
HOW ARE UMBRELLA COMPANIES AND OTHER EMPLOYEES AFFECTED?
It is now be the responsibility of employers, including umbrella companies, to ensure employees are auto-enrolled at the right time and that the correct contributions are deducted and paid into a workplace pension.