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Employees can plan their retirement through a workplace pension which is managed by their employer till the time he / she is working. It can also be termed as ‘company’ or ‘occupational’ or ‘work-based’ pensions. Usually, an employer puts aside a percentage of an individual’s earning / salary per month into the pension scheme. More often than not, an employer also contributes a similar amount towards the pension scheme. Each year, millions of employees are registered for a workplace pension scheme by their employer. Once an individual is registered, and the pension is deducted each month an individual may be eligible to get a tax relief from the UK government. An individual might be eligible to get tax relief (worth 100% of annual earnings) on their workplace pension contribution. An individual is automatically eligible for tax relief if:

  • An employer deducts the workplace pension contributions from the monthly pay before subtracting Income Tax
  • Pension provider or the employer claims tax relief for an individual at a rate of 20% and clubs it with an individual’s pension pot
Understanding Workplace Pension

Saving into a workplace pension is simple. An individual can decide to opt out from a pension scheme but he / she will be losing out on the government and employer contribution. According to the norms, an employer will register an employee into a workplace pension scheme if:

  • An individual works in the UK
  • An employee is not already enrolled into a workplace pension scheme
  • An employee is aged between 22 and State Pension age
  • An individual earns in excess of £10,000 a year (£833 a month, £192 a week)

Starting 6 April 2018, the least contributions towards the workplace pension will upsurge and below mentioned are the expected rates:

Effective date of change Minimum employer contribution Contribution of employee Total least possible contribution
Until 5 April 2018 1% 1% 2%
Starting 6 April 2018 until 5 April 2019 2% 3% 5%
Starting 6 April 2019 3% 5% 8%

Automatic Enrolment

According to the UK law, under the Pensions Act 2008, each establishment in the UK need to place some number of employees into a workplace pension scheme and make the necessary contribution. This process is referred to as Automatic Enrolment and is applicable for all employers who have a minimum of one member of workforce. To avoid any confusion, auto enrolment doesn’t hold applicable for businesses that employ somebody to work directly for them, for example, private care assistant (nanny) or a cleaner. As an employers, it becomes mandatory to ensure that any qualified employee is registered into a workplace pension. In case an employee has any confusion about their eligibility, he / she can visit The Pensions Regulator’s website and make use of the duties checker. The duties checker tool will need the following information to complete this process (after the information is provided it will give custom-made guidance in order to complete the Automatic Enrolment duties):

  • Pay-as-you-earn (PAYE) reference: The PAYE reference number can be traced on the letter an individual has received with regards to automatic enrolment. This number can also be found on the letter an individual receives from HM Revenue and Customs (HMRC) when he / she initially register as an employer

  • Letter code: The letter code is a 10 digit code which is mentioned on a letter an individual has received regarding automatic enrolment

  • Age and earnings: It is imperative for an employer to know the age and estimated earnings of someone who is employed by the business

Also See: Auto Enrolment Update – Duties for New Employers From 1ST October 2017

Different types of workplace pensions

Workplace pensions are also well-known as occupational pension schemes or company pensions. There are diverse types of workplace pension schemes and these different schemes work in different ways. Broadly speaking, the workplace pension schemes fall under three main categories:

  • Cash balance plans: Cash balance are also termed as hybrid schemes, and comprise parts of both defined benefit pension scheme and defined contribution pension schemes

  • Defined benefit pension schemes: Defined benefit pension schemes offers retirement assistance that are dependent on an individual’s remuneration and the time-period for which an individual has been an affiliate of the scheme. Each pension scheme defines what is meant by ‘earnings’ and the ‘earnings’ amount may not be the similar amount that is presented on an individual’s pay slip. Earnings for pension purposes (or pensionable earnings) may not comprise of additional payments received such as bonus; commission; overtime or other benefits. They may also only be based on a proportion of an individual’s wages or salary. Illustrations of this scheme comprise career average revalued earnings (CARE) scheme and final salary schemes

  • Defined contribution pension schemes: Defined contribution pension schemes invest the contributions, made by an individual or their employer, in a range of different investments. Defined contribution pension schemes may also be known as money purchase schemes. An individual may be offered a choice about how the contributions are invested. The benefits that an individual will receive at retirement depend on:
    • How much has been paid on an individual’s behalf
    • The amount of time that it has been invested
    • How the investments have performed over this period

Each type of scheme may provide an individual with an income in retirement, or a tax-free cash lump sum and an income

Other important details

When an employer doesn’t have to automatically register an employee

An employer typically does not have to automatically enrol an employee if any of the following apply:

  • An employee has previously taken a pension agreed through the employer
  • If an employee has already informed the employer that he / she is leaving the job, or are serving the notice period
  • If an individual is in a limited liability partnership (LLP)
  • If an individual is a director without an employment contract and employ at least one other person in the company
  • If an employee gets a special payment from a workplace pension scheme that has been discontinued, and leaves the job and later re-joins the same job within a period of 12 months
  • If an employee has evidence of their lifetime allowance protection
  • If an employee is from a different European Union (EU) member state and are availing a EU cross-border pension scheme

However, if an employee’s income is low, he / she does not have to contribute to the pension scheme; here ‘low income’ refers to the below earning figures:

  • £490 per month
  • £113 per week
  • £452 per 4 weeks

Automatic enrolment of an employee

Auto Enrolment: How It Works?

An employer must provide in written, to an employee, details about enrolling automatically into their workplace pension scheme. An employer must provide the following details to an employee:

  • the date on which an employee was added to the pension scheme
  • details about the category of pension scheme and the organisation who runs it
  • detail about the how much is the employee and employer share towards workplace pension contribution
  • How can an employee exit the scheme, if he / she wishes to
  • how tax relief applies to an employee

Both, employee and the employer must contribute a minimum percentage towards workplace pension scheme and this is referred to as ‘qualifying earnings’. The qualifying earnings are computed from either:

  • the amount an individual has earned before tax between £5,876 and £45,000 a year
  • total salary or earnings before tax
  • an employer decides the qualifying earnings amount

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