What employers should know about workplace pensions
What is a Workplace Pension?
What is a pension?
A pension is a tax-efficient way of saving towards retirement. Employees can contribute some of their earnings to a pension now so that they are able to live comfortably in retirement when they are working less or are no longer employed.
What is a workplace pension scheme?
Legally, all UK employers have to provide a workplace pension scheme for staff who meet the eligibility criteria as soon as their first member of staff is employed. This is referred to as an employer’s “duties start date”.
The most common workplace pension schemes require an 8% minimum total contribution which has to be made up of a minimum of 3% employer contribution, thus leaving the employee to make up the 5% difference. This pot of money is an investment that increases over time and allows an employee to live comfortably during retirement. If using a Relief at Source scheme, employees will receive tax relief from the government on workplace pension contributions. An individual’s workplace pension savings are usually accessible when they are aged 55.
If an employee who was previously non-eligible for the scheme then becomes eligible due to a change in age or earnings, an employer must write to them within 6 weeks of the change and add them to the workplace pension scheme. Employees should be assessed for auto enrolment each time they are paid and most payroll softwares will allow you to do this with ease.
Relief At Source:
Relief at source refers to tax being reduced for pension purposes through the payroll for a defined contribution pension scheme. An employee’s pension contributions are taken from their net pay, after they have been taxed on their wages. Their contribution amount is reduced by 20% as relief at source, and this 20% is then automatically claimed from the Government by the pension provider and added to the employee’s pension contribution.
If an employee is a higher rate taxpayer, they will need to complete a Self-Assessment tax return and submit it to HMRC in order to claim the extra tax relief they are entitled to.
With a relief at source scheme, basic rate tax relief is added to an employee’s pension contributions even if they are not earning enough to pay any tax.
Net Pay Arrangement
The alternative to the relief at source scheme is a net pay arrangement. In this instance, pension contributions are deducted from an employee’s salary before tax is calculated, so no tax is paid on the pension contribution. The employee will automatically receive tax relief at their highest rate of income tax.
Benefits of a workplace pension scheme:
Employees are able to take their workplace pension savings with them should they change employers. Due to employer contributions, an employee’s ultimate savings for retirement will be larger than if they relied solely on their own contributions. The extra money will help people to live life more comfortably during retirement.
Even when using a workplace pension to live during retirement, an individual can still access the state pension that they are entitled to. This means that their overall retirement income is increased.
Saving for a pension is a good investment, and is likely to produce better returns than a regular savings account. Therefore, contributing to a workplace pension scheme is a good idea if possible.
Pension Scheme Criteria
Workplace pension employer rules
To meet the legal criteria for a workplace pension scheme, an employer must ensure that they auto-enrol certain employees into the scheme and write to them to let them know of this. Employees aged between 22 and state pension age who are earning over the threshold in a given pay period (£10,000 per annum, £833.33 per month or £192 per week) and are working mainly in the UK with a contract of employment must be enroled.
As an employer, you must ensure that you provide a workplace pension scheme to your employees. You must enrol qualifying members of staff into the scheme and contribute the minimum employer contribution (3% of employees pay). In addition, you must communicate with employees and inform them of their right to join the scheme should they wish.
Meeting employer duties
As an employer, you must ensure that you choose a pension scheme that can be used for auto-enrolment. This is known as a “qualifying scheme” and more information can be found on The Pensions Regulators website. You must also determine which of your employees are eligible to be included in the scheme. Most payroll software will have built in procedures to be able to do this for you.
An employer must meet their auto-enrolment duties even if they only employ one person. The nature of this employment could be as a personal assistant, or for personally arranged childcare.
The jobholder’s category is made up of two groups of workers, non-eligible and eligible jobholders. Jobholders are those aged between 16 and 74, who normally work in the UK, and have qualifying earnings for automatic enrolment into their workplace pension scheme payable by the employer in the relevant pay reference period.
1. Eligible Jobholders:
Eligible jobholders are named as such because they are eligible for automatic enrolment into their workplace pension scheme. These workers are aged between 22 and the current state pension age and normally work in the UK under an employment contract. Eligible jobholders have qualifying earnings payable by their employer in the relevant pay reference period and these must be above the minimum earning threshold for automatic enrolment, currently £833.33 in any given month, or £10,000 annually. This group of workers should be auto enrolled into the workplace pension.
2. Non-eligible Jobholders:
Non-eligible jobholders are not eligible for automatic enrolment into a workplace pension scheme. However, they can opt into the scheme if they choose to. Non-eligible jobholders are those aged between 16 and 74, working in the UK as shown in their employment contract and have qualifying earnings payable by the employer in the relevant pay reference period that are below the threshold for automatic enrolment. Within this group are also workers between 16 and 21 who work in the UK and are earning above the minimum earning threshold for automatic enrolment.
This group of workers should not be auto enrolled but must be given information about the right to opt into the pension scheme. The employer will need to make contributions too if the employee chooses to opt in.
An entitled worker is a term used to describe workers who are aged between 16 and 74, work in the UK and earn less than the lower level of qualifying earnings (£6,240).
Entitled workers will not automatically be enrolled but can request to join the workplace pension scheme. However, this does not have to be the same scheme offered to eligible and non-eligible jobholders. The scheme could be a personal pension or another type of pension scheme.
As an employer, you do not have to contribute to an entitled workers’ pension, but you may wish to and must let them join the scheme if they ask.
You can choose to delay working out who to put into a pension scheme for up to three months for some or all of your staff. This is known as postponement. You must write to your staff to tell them what you are doing and how automatic enrolment applies to them. Further detail can be found on The Pension Regulators website.
What happens if an employee has more than one job?
If an employee is employed by more than one employer, each employer must check if they are eligible to be auto-enrolled into the company workplace pension scheme. Eligible employees will be auto-enrolled into each workplace’s pension scheme meaning that they could be saving for retirement in two different places.
If an employee is not an eligible jobholder, they can still request to join each employer’s workplace pension scheme. In this case, despite an employee having more than one pension pot, they may choose to combine these in the future. This could be an option if they have several employers at once or leave a current employer and join another company.