Posted 9 months ago by Jon
There have been a number of changes to pensions over the years. Most recently, changes have been made to the minimum level of contributions required for automatic enrolment pensions. We outline below what these changes are, who is likely to be impacted, and how your business can best prepare for the increases.
As from 6 April 2018, the total amount of minimum contributions required for automatic enrolment pensions increased from 2% to 5% of qualifying earnings. Broken down, this means that for the 2018/19 tax year, the minimum amount an employer should legally contribute into an automatic enrolment pension scheme is 2% and the minimum contribution required from an employee is 3%. Before the 6 April 2018 changes, total minimum pension contributions were only 2%, comprising 1% for employers and 1% for employees. As such, the 2018 changes represent a significant increase in the amount of minimum pension contributions.
However, these levels will change again in 1 year's time: from 6 April 2019 the total minimum pension contributions will increase from 5% to 8%. Minimum contributions will rise to 3% for employers and to 5% for employees.
These changes have been summarised in the table below:
|Effective Date||Minimum Employer Contribution||Minimum Employee Contribution||Total Minimum Contribution|
|Prior to 6 April 2018||1%||1%||2%|
|6 April 2018 - 5 April 2019||2%||3%||5%|
|6 April 2019 onwards||3%||5%||8%|
It should be noted that these changes to pension contributions only reflect the minimum pension contributions required. If either an employer or employee wishes to contribute more to the employee’s pension, then they are welcome to do so. However, failure to keep to the new minimum total contributions will stop the pension scheme from being considered a qualifying pension scheme for its existing members.
The amount of contribution required from employer and employee is based on the qualifying earnings of the employee. Examples of qualifying earnings include salary and wages, overtime, bonuses, holiday pay, statutory sick pay, as well as statutory pay during periods of leave, such as maternity or paternity leave. For the 2018/19 tax year, qualifying earnings are calculated on any qualifying amount a staff member earns between £6,032 and £46,350. This means that an employer should not need to contribute to a worker’s pension pot if that employee’s income is less than £6,032 a year. Note that these amounts are subject to annual review by the government, and may change in future tax years.
A qualifying pension scheme is simply a pension scheme that an employer can use for automatic enrolment. The scheme can be an existing one or it can be newly established, provided that minimum quality standards are maintained. These standards vary depending on whether the scheme is a defined benefit scheme or a defined contribution scheme.
These changes will impact employers that have automatic enrolment pensions. Automatic enrolment refers to a workplace pension scheme that employers are required to automatically enrol their staff in if that member of staff:
Currently, the state pension age is set at 65 for men and by November 2018 it will be 65 for all women as well. There are gradual increases scheduled to the pension age, with it is expected to reach 68 between 2037 and 2039.
Although the most recent changes to minimum pension contributions are already in effect, it pays for employers to be prepared for the upcoming changes to pension contributions in April 2019. Some of the best ways to prepare are to ensure that the contributions deducted under your current pension scheme will remain compliant with the minimum levels being introduced in 2019, communicating upcoming changes with your workers, and ensuring that you have the processes in place to ensure that minimum contributions are being deducted.
It may be the case that your current pension scheme’s terms and conditions already accommodate the increases in minimum contributions in 2018 and 2019. If so, then no consultation should be required with the scheme’s members.
However, if your pension scheme will need to be amended in some way to account for the upcoming changes in 2019, then you should consult with the scheme’s members before any changes are approved. Consultation is a requirement where an employer has 50 or more employees. However, if you are in doubt as to whether you need a consultation, then it is best to speak to your scheme provider.
An employer should provide advance communication to its employees about the changes to contribution levels. Letting staff members know of the changes in advance will help to ease the transition, and also reduce the number of potential questions they have when the increased contributions come into effect.
It is also worth speaking to your payroll team well in advance of the 2019 changes to make sure that the correct contributions will be deducted when the increases come into effect on 6 April 2019. Your payroll team should already be familiar with the process given the recent increases in pension contributions brought in on 6 April 2018, but again some advance preparation will be required for 2019. It may also be that these changes are automatically built into their payroll software, but it is best to check with your payroll team or provider that this is the case, and if not how the transition will be best managed.
Although the changes to the minimum total pension contributions will be fresh in the minds of employers, employees and payroll providers alike, it is important to note that there are further changes to pension contributions scheduled for 6 April 2019. By understanding these changes in advance, steps can be put in place to ensure employees and payroll teams are aware of and ready for the further increases in contribution levels. Now is also a great time to review the terms and conditions of your pension scheme, to ensure that your scheme has accounted for these upcoming changes. Your pension provider should also be able to help you with any questions you have about your scheme, and whether you remain a qualifying scheme under the new changes.
If you would like any further advice on the upcoming increases to minimum pension contributions and what it means for your business, you can also speak to your local accountant.