Auto Enrolment – Workplace Pensions What Are They?

Auto Enrolment – Workplace Pensions What Are They?

Workplace Pensions – What They Mean For Employees and Employers

Occupational pension schemes have traditionally only been offered by larger companies, with many employees of smaller companies forced to make their own personal provision without any support from their employer.

The Government has now introduced its Workplace Pensions scheme, under which almost every employee in the UK will have access to a work-based pension scheme, and will be able to benefit from employer contributions.

Employees who meet all of these criteria must be offered a workplace pension:

  • Aged between 22 and state pension age
  • Work in the UK
  • Earn at least £10,000 per year

Anyone who employs someone who meets these criteria is covered by the requirements, even a private individual who employs a nanny, gardener, carer or other domestic assistant.

Required contributions are based on pre-tax earnings between £5,824 and £42,385 a year (these amounts will change in future tax years). These are known as ‘qualifying earnings’.

On joining the scheme, an employee must pay a minimum of 0.8% of their qualifying earnings into the scheme. So for example, someone earning £15,824 per annum would have a minimum contribution of 0.8% of £10,000, which is £800 per year. Whatever the employee pays in, the Government will add an extra 25% in the form of tax relief, so in this example £200 would be added as tax relief.

The minimum contributions for employees will rise to 2.4% in April 2018 and 4% in April 2019.

Employers must pay at least 1% of each employee’s qualifying earnings into the scheme. So in the above example, they would need to pay £1,000. The minimum contributions for employees will rise to 2% in April 2018 and 3% in April 2019.

All eligible employees must be automatically enrolled by their employer, so any individual not wishing to be a member of the scheme must actively opt out by informing their employer.

In March 2016, the Government announced the introduction of a new Lifetime ISA, which can be used for retirement savings. Here the saver can contribute up to £4,000 per tax year, and the Government will top up these contributions by 25%, so in practice this works in a similar way to tax relief on employee contributions, as mentioned above. However, the lifetime ISA does not allow employer contributions.

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