The minimum contributions which employees and employers must pay in pension contributions is due to increase. Failure to comply can incur penalties of up to £10,000 per a day. The pension changes are applicable from April 2018.
Most businesses with employees have already set up pension schemes and they are registered for auto enrolment with the pensions regulator.
They are paying at least the minimum contributions required and are compliant with the pension rules.
Current pension contributions for tax year 2017/18
Currently the minimum pension contributions that need to be paid into an employee’s pension scheme is 2% of their qualifying earnings.
At the moment this is typically paid as 1% by the employee and 1% by the employer.
What is changing to pensions from 6th April 2018?
The pension changes from April 2018 are required by law. From April 2018 the total pension contributions must be 5% of the employees qualifying earnings.
The employer must pay a minimum of 2% of the employees qualifying earnings. This leaves a balance of 3%. The employee must pay this, giving the total of 5% into the employees pension scheme.
Are there any further changes to pensions after 2018?
The minimum contributions towards an employees pension rises again in April 2019. From this date the pension changes to an 8% minimum contribution.
The employer minimum contribution increases to 3% leaving the employee with a balance of 5%.
Can higher pension contributions be made?
An employee and an employer can pay higher contributions into the pension scheme. The rates mentioned above are minimum contributions.
If an employer pays in higher pension contributions than the minimum required the employee can pay in less pension contributions.
As an example in the tax year 2018/19 the total minimum pension contribution is 5% and the minimum employer contribution is 2%. There is no minimum employee contribution. If the employer paid in the full 5% pension contributions. The employee could pay no contributions as the total required is met. However if the employer only paid in 4% pension contributions. Then the balance of 1% must be met by the employee in order to satisfy the 5% total minimum requirement.
Should you inform employees of the pension changes
When auto enrolment was introduced all employees would have been notified of the pension changes in 2018. In 2019 so there is no formal requirement to notify them again.
However we suggest it is best practice for employers to notify their employees again of these pension changes. If only just to avoid the employee questioning their first payslip and why their net pay isn’t as high as they may have expected.
How much will the new pension changes cost an employee
If the employer pays the minimum pension contributions. The employee will need to pay the shortfall which is 1% in 2017/18, 3% in 2018/19 and 5% in 2019/20.
The government adds tax relief to the employee pension contributions. The effective rate that the employee must pay is 0.8%, 2.4% and 4% on the above tax years. This is the effective rate payable on qualifying earnings.
As an example an employee earning £27,000 per annum will pay pension contributions of £169 in the current tax year 2017/18. The pension contributions will increase to over £500 in 2018/19 and to over £800 in 2019/20.
How much will the new pension changes cost an employer
The employer minimum pension contributions increase from 1% in 2017/18, to 2% in 2018/19 to 3% in 2019/20.
As a crude example if the employer pays only the minimum required and it costs the business £10,000 per annum towards employees pensions now. Then in 2018/19 the total cost will be £20,000 and in 2019/20 it will be £30,000 in pension contributions.
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