Automatic enrolment: Increased contributions
The Pensions Regulator (TPR) recommended allowing plenty of time for ensuring that increasing contributions were in line with the legal minimums, but many employers did not heed this advice.
The minimum parameters for qualifying pension schemes for automatic enrolment include minimum contribution levels. These were set at low levels initially to help employers manage the costs of introducing automatic enrolment, with a timetable set out for how the minimum contribution levels would increase over time.
Originally, the increases were planned to come into effect in October 2017 and October 2018. To simplify the administration of automatic enrolment, the Government announced at the Autumn Statement in 2015 that the two rises to the minimum contribution levels would be deferred to the following April, to coincide with the tax year.
The Employers Duties (Implementation) (Amendment) Regulations 2016 came into force on 1 October 2016 to put this change into effect.
|From date||Minimum total contribution||Minimum employer contribution|
|6 April 2018||5%||2%|
|6 April 2019||8%||3%|
How the minimum contribution levels work
The rules specify the minimum employer contribution and the minimum total contribution. Employees are required to make up any shortfall between the employer’s contribution and the minimum total contribution.
For example, from 6 April 2019 the minimums will be 8% in total with 3% from the employer. If the employer contributes the minimum 3%, then employees must contribute at least 5%. If the employer contributes 6%, then employees must contribute at least 2%. If the employer contributes 8%, then employees need not contribute (depending on the scheme’s rules).
Employers and employees can choose to contribute rates that are above the minimum levels.
Implementing contribution increases
TPR’s communications stress that employers need to prepare for the increases in plenty of time, including communicating with affected staff.
Employers should have liaised with their pension scheme providers at an early stage – the provider would have been able to confirm whether increases are necessary (contributions might already exceed the new minimum) and have agreed what the balance of employee and employer contributions will be (employers may choose to cover any increase in staff contribution rates themselves). The pension scheme may have rules and processes in place that cover how to increase contributions.
Employers should identify affected staff and communicate with them. The Pensions Regulator provides guidance on increasing contribution rates (phasing) for employers on its website. This includes a template letter to employees that employers can download and adapt for their own use. Alternatively, the pension scheme might also provide a template letter or plan to communicate with scheme members directly.
Note that the first increase must have been implemented with effect from 6 April 2018 even if this is in the middle of a pay period, however increases can be implemented sooner than the statutory increase date.
Pension scheme members who do not wish to pay increased contributions may, depending on the pension scheme’s rules, be allowed to remain on a lower contribution rate or to reduce their contribution rate after the general increase (known as ‘opting down’). However, technically it is still opting out of the automatic enrolment scheme because the minimums requirements are not met, so there may be other implications.
As you would expect, more detailed information on all aspects of increases in minimum contributions for automatic enrolment pensions aimed at pension, payroll and software developers is also available from TPR.
Increasing contribution rates
This is the earnings band used to calculate minimum contributions and is aligned with National Insurance thresholds. The band for the tax year 2017-18 was between £5,876 and £45,000. The band for the tax year 2018-19 is between £6,032 and £46,350.
This is the prescribed level of qualifying earnings at which the employer must take action to enrol the worker automatically into a suitable pension scheme. The earnings trigger is £10,000 for the tax year 2018-19 (unchanged from the tax year 2017-18).
|QEB lower level||£5,876||£6,032|
|QEB higher level||£45,000||£46,350|
Tax relief implications
When the earnings trigger was first introduced, the income tax threshold was also £10,000 so that individuals who do not pay tax would not be enrolled automatically into a pension scheme. From April 2015, the tax threshold rose above the earnings trigger, which did not change, so that now there is a growing number of individuals who do not pay income tax but who are being enrolled into pension schemes.
For schemes that operate tax relief on a relief at source basis, the pension provider will claim the tax relief, including that due to non-taxpayers. Where schemes operate the net pay arrangement, the tax relief is given through the payroll by reducing taxable pay. However, employees whose earnings are below the tax threshold, but above the earnings trigger, do not have any taxable pay and therefore miss out on the tax relief.
This anomaly may be a relevant factor for organisations considering which auto enrolment pension schemes to offer to their workforce, particularly as minimum contributions have now increased. TPR suggests that employers with workers who not pay tax should consider choosing a pension scheme that operates relief at source.
For many employers the increase to these rates will have had little or no affect as they are already contributing in excess of the legal minimums. However, this isn’t straight forward as implementing other rate increases might be, such as the minimum wage rates, and all factors need to have been considered.