Workplace Pension

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 one of two ways that an employer can claim tax relief for employees on contributions for a defined contribution pension scheme. An employee’s pension contributions are taken from their pay after they have been taxed on their wages. Relief at source means that tax relief is automatically claimed at  the basic tax rate of 20% and this is then added to the  employee’s pension contribution.

If an employee is a higher rate tax payer, 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.

The alternative to the relief at source scheme is a net pay arrangement. In this instance, pension contributions are deducted from an employee’s gross salary (prior to tax deductions). An employee then pays tax on salary total (after deducting) the contributions. The employee will automatically receive tax relief on 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 auto-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 softwares 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.

Jobholders:

The jobholder’s category is made up of 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.

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. They are also those who normally work in the UK as identified in their 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.

Non-eligible Jobholders:

Non-eligible jobholders are not eligible for automatic enrolment into their workplace pension scheme. However, they are able to opt into the scheme if they choose to. Non-eligible jobholders are those aged between 16 and 74, who normally work in the UK as shown in their employment contract or have qualifying earnings payable by the employer in the relevant pay reference period that are below the threshold for automatic enrolment. 

Those who meet the above criteria but instead have qualifying earnings above the minimum threshold can be auto-enroled into their workplace pension scheme.

Entitled workers:

Entitled worker is a term used to describe those who are aged between 16 and 74, work mainly in the UK and earn less than the lower earnings threshold (£6,240). 

Entitled workers can request to join their 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, however, you may wish to and must let them join the scheme if they ask. 

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 are 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.