Payroll

Auto Enrolment Pension Increase 2019

The auto enrolment pension increase 2019 will typically mean employees pay 5% and employers pay 3% into the pension scheme.

When auto enrolment was first announced back in 2012 a phasing of contributions was setup.

The phasing was set up so that minimum contributions were increased over time. In 2017 the minimum was 2%. In 2018 it increased to 5%. Now the auto enrolment pension increase 2019 will be 8%.

Current pension contributions for tax year 2018/19

The current minimum that must be paid into the employee pension scheme is 5% of qualifying earnings.

The employer must pay in a minimum of 2%.

There is no employee minimum. However if the employer only pays the minimum 2%, the employee must pay the remaining 3%. This way the minimum total requirement of 5% is met.

Auto enrolment pension increase 2019 and onwards

The total minimum that must be paid into the employee pension scheme will increase to 8% of qualifying earnings.

The employer must pay in a minimum of 3%.

There is no employee minimum. But as with previous years the total minimum must be met. Therefore if the employer only pays in 3% then the employee must pay 5%. Then the 8% minimum is met.

Can higher contributions be made?

The above rates are minimum requirements. Both the employee and employer can pay in higher contributions.

As an example the employer could pay in the full 8% requirement. But, as there is no minimum requirement for employees and the total 8% is met, the employee could make no contributions.

Alternatively if the employee paid in the full 8% requirement, the employer would still need to make contributions. This is because the employer must always pay in a minimum of 3%.

Inform employees of the auto enrolment pension increase 2019

There is no legal requirement to inform employees of the auto enrolment pension increase 2019.

It is not required as this information was provided when the employee original joined the auto enrolment pension scheme.

We, however do recommend that you do inform them. Most employees will see their pension contribution increase from 3% to 5%, this will result in a reduction in net pay. Informing them in advance may prevent the employee questioning their first April 2019 payslip.

Cost to the employee of the auto enrolment pension increase 2019

The employee must ensure the total minimum % is met. If the employer only pays their minimum the employee then must pay in 3% in 2018 and 5% in 2019.

As an example an employee earning £27,000 per annum will currently pay pension contributions of £629. The take home pay is £1,770 per month. This relates to tax year 2018/19.

For tax year 2019/20. An employee earning £27,000 per annum will need to pay pension contributions of £1,043. The take home pay then drops to £1,755 per month.

The above calculations assume the employee is entitled to the full personal allowance. This is £11,850 in tax year 2018/19 and £12,500 in tax year 2019/20.

Cost to the employer of the auto enrolment pension increase 2019

The employer must pay in minimum contributions of 2% for the tax year 2018/19. This increases to 3% for the tax year 2019/20.

As a crude example, if the current pension costs to the company are £20,000 per annum. From 2019/20 they will increase to approximately £30,000 per annum. This is therefore a 50% increase to the employer.

Conclusion

For employees:

The additional pension contributions will hit a lot of employee pockets. Some may even consider opting out of auto enrolment. Every individuals situation is different but our default position is to advise against opting out.

We all need to put some money away for our futures and auto enrolment aims to do just this. By opting out you also remove the employers’ requirement to pay into your scheme.

The minimum 8% requirement is actually made up of 4% employee contributions, 1% government contribution and 3% employer contribution. Therefore it is important to remember that your contribution is effectively doubled.

For employers:

The additional pension contributions will need to be budgeted. We recommend that the additional 1% pension contribution is taken into account when discussing pay increases.

Employers also need to ensure that their payroll software or provider is up to date with the auto enrolment pension increase 2019. The penalty for failing to comply with the pension authorities can be anything up to £10,000 per day.

To ensure your business is compliant contact a Chartered Accountant today on 07961048484 or email advice@pattersonhallaccountants.co.uk

Also see Pension Changes 2018

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