Are you ready for higher automatic enrolment contributions from 6 April?

Posted by Sean McNulty on
As many employers will know, on 6 April 2018, and then again on 6 April 2019, the minimum contributions to a pension scheme for the purposes of the automatic enrolment regime will increase. 

The current minimum employer contribution is 1% of 'qualifying earnings' (which is virtually all earnings in a band from £5,877 to £45,000, and includes bonuses and commission) in respect of each worker (not just employee), but only if the worker also makes a contribution of the same amount. In that case, the current minimum worker contribution is also 1% of 'qualifying earnings'. Or, the current minimum employer contribution is 2% of 'qualifying earnings', where the worker does not make a contribution.

On 6 April 2018, the minimum employer contribution will increase to 2% of 'qualifying earnings', if the worker also makes a contribution of 3% of 'qualifying earnings'. In that case, the minimum worker contribution will then be 3% of 'qualifying earnings'. On 6 April 2019, the minimum employer contribution will increase to 3% of 'qualifying earnings', if the worker also makes a contribution of 5% of 'qualifying earnings'. The minimum worker contribution will then be 5% of 'qualifying earnings'.

Clearly, employers will need to ensure that their pension schemes satisfy the higher minimum contributions from 6 April 2018 and 6 April 2019 in order to continue to comply with the automatic enrolment regime.

There is a difficulty, though, which some employers may face. It can arise where contributions to a pension scheme are based on basic salary (as many are), rather than on 'qualifying earnings'. The difficulty is that, where employees make contributions based on basic salary and the employer wants to keep that structure, the employer would need to consult with employees over a 60 day period where an increase in the employees' contribution took them beyond the new minimum contribution.   

Or, an employer in this situation could build minimum contributions based on 'qualifying earnings' into their pensions arrangements.

Example

To illustrate the point, where, for example, an employee has a basic salary of £25,000 and has no other earnings, a contribution by him or her of:

  • 2% of basic salary (i.e. £500);

is higher than;

  • 2% of 'qualifying earnings', which in the 2018/19 tax year, for this employee, will be earnings between £6,032 and £25,000 (i.e. £379.36).

In this example, if the employee currently makes a pension contribution of 1% of basic salary (i.e. £250) and the employer wants to keep a contribution structure based on basic salary and increase the minimum employee contribution to 2% of basic salary (i.e. £500), the employer would need to consult with employees over a 60 day period. The employer would need to do this because the increase would be to an amount higher than the new minimum (i.e. £379.36). Or, the employer could increase the minimum employee contribution from 1% of basic salary to 2% of 'qualifying earnings'.  

About the Author

Sean is a Senior Associate who has specialised Pensions Law for ten years, based in our London office.

Sean McNulty
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020 7814 6862

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