The government recently put new rules in place for employees to contribute to a compulsory pension scheme. Employers also need to contribute to this fund each month based on the employee’s wages. But how much needs to be contributed by both parties?
How contributions work
Under the automatic enrolment scheme set out by the government, the amount that an employee must contribute is steadily increasing between now and April 2019. Under the scheme, employers need to pay some of the minimum total contributions and if this doesn’t cover the entire amount required, then the rest must come from the employees’ wages.
The government also contributes to the pension pot in the form of tax relief that the employee receives for their contributions. Even if the employee doesn’t earn enough to pay income tax, they can still get relief if the scheme they are enrolled in uses it and have this money added to their pot.
The amount of contributions is based on staff’s ‘qualifying earnings’. This figure comes from the amount they earn before any tax or national insurance has been deducted. If they fall between a lower and upper earnings limit, then they are required to contribute to their pension pot. All types of earnings go into this figure including wages, salary, commission, bonuses and other payments.
For the 2017-18 tax year, the first £5876 of earnings doesn’t count towards the calculations. So, if an employee earned £20,000, their contribution would be based on £14,124. This means you do need to check if people are moving above and below the minimum figure if they are on a low wage working only a few hours.
Payroll outsourcing with a company like Trace Payroll means you don’t have to worry about keeping up to date with payroll changes.
For employers, there is often a good reason to pay more than the minimum amount they are required to pay – it is a good incentive for employees. With the job market being very healthy, people are more inclined to look around at jobs. Having an employer contribute all of your pension contributions or even more is a great way to get and keep the best staff.
For help with your payroll get in touch with Trace Payroll Services using the details below, or fill out a contact form.