In April 2021, 79% of employees in the UK, which is about 22.6 million people, were saving money in a workplace pension. This went up a bit from 78% in 2020. One reason for this increase is that more people started working in government jobs because of the COVID-19 pandemic.
For many years, more and more people were joining workplace pensions. This started in 2012 when the government made a rule called “auto enrolment pension”. But what exactly is auto enrolment pension?
In this article, we will guide you through everything you need to know about auto enrolment pension as an employee.
What is auto enrolment pension?
Auto enrolment pension in the UK is a government initiative which requires employers to automatically enrol eligible workers into a workplace pension scheme and make contributions to their pensions.
For example,
your employer, in compliance with the auto enrolment pension rules, automatically enrols you in the company’s workplace pension scheme. This means you become a member of the pension scheme without having to take any action. You’ll receive a notice from your employer explaining that you’ve been enrolled in the pension scheme.
The main motive of this initiative was to address the issue of low pension savings and ensure that more people have a pension plan for their retirement years. This helps employees to secure an additional source of income beyond the state pension.
How do I know if I have been automatically enrolled in a pension scheme?
To determine if you have been automatically enrolled in a pension scheme, you should follow these steps:
- Check Your Payslip
One way to find out is by examining your payslip. If you have been automatically enrolled, you will see deductions for pension contributions.
- Review Your Correspondence
Your employer is required to inform you in writing when they automatically enrol you in the pension scheme. They must tell you the specific date on which they enrolled you in the pension scheme, details about the type of pension scheme in place and the pension provider.
A breakdown of the contributions outlining both your employer’s contribution and your own contribution and also an explanation of the process for leaving the scheme if you choose to do so.
- Contact Your HR or Payroll Department
If you are unsure, you can reach out to your company’s HR or payroll department. They can confirm whether you have been enrolled in the pension scheme and provide you with details.
- Consult Your Pension Provider
If you’ve received information about the pension scheme, you can contact the pension provider to verify your enrollment status and get more information about your pension account.
- Access Your Online Payroll or Pension Portal
Some companies provide employees with online access to their payroll or pension information. Check if your company offers such a portal where you can see your pension contributions and status.
It’s essential to be proactive and make sure you understand your pension status and contributions to plan for your financial future effectively.
What conditions must be met to participate in auto enrolment pension?
Your employer has a mandatory responsibility to enrol you (even if there is a single staff) in a pension scheme and provide contributions to your pension fund when the following conditions are met:
- You have a contract, written or verbal, to provide services or work in exchange for payment or benefits and can’t easily delegate the work to someone else. The employer must consistently offer work as long as the contract lasts. The individual must not be operating as part of their own limited company, with the ’employer’ essentially being a customer or client.
- Auto enrolment pension age falls within the range of 22 to the State Pension age (currently being 66). It means that this benefit is extended to individuals within this age bracket.
- Auto enrolment pension threshold is £10,000. Your yearly earnings before tax must meet or exceed the threshold of at least £10,000. If you get a monthly payment, earnings should be £833 (£10,000/12) and so on.
- Your regular employment must primarily occur within the United Kingdom.
What is the minimum amount I need to invest in the auto-enrolment pension scheme?
The total minimum contribution required, as of now, is set at 8%. So, the question arises, how much does an employer have to contribute to auto enrolment? Out of this, your employer is responsible for contributing a minimum of 3%, while you are expected to contribute the remaining 5%.
However, your employer has the flexibility to contribute more than the minimum requirement, which would then reduce your contribution unless you choose to contribute more voluntarily.
For example,
If your employer pays the full 8%, you won’t have to pay anything extra. But if your employer only contributes the minimum of 3%, you will be responsible for the remaining 5% to meet the overall 8% requirement.
However, there’s a condition: if your employer covers the entire contribution to your pension pot, you won’t receive any tax relief on your pension contributions.
The mentioned percentages are designed to apply to a specific range of income known as “qualifying earnings.”
These qualifying earnings include various forms of income, such as wages, salary, bonuses, commissions, and even statutory pay. Importantly, these earnings are calculated before any tax or National Insurance contributions are deducted.
The range for which these percentages are applicable spans from £6,240 for the year 2023/24 to a maximum limit of £50,270.
In other words, if your annual earnings fall within this range, these specified percentages will be used to calculate both your and your employer’s contributions to the auto-enrolment pension scheme.
This range helps establish a fair and consistent basis for pension contributions for individuals within these income brackets. It’s vital to note that the specific figures and income thresholds may change in different tax years or due to updates in government regulations.
Therefore, it’s advisable to refer to the most recent guidelines and thresholds for accurate information regarding pension contributions.
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I am a temporary staff; does auto enrolment pension scheme apply to me?
Yes, auto-enrolment pension can apply to you, even if you’re a temporary staff member.
Auto-enrolment covers all employees who meet the criteria, including those in temporary, seasonal, or irregular work, such as labourers, or retail workers hired during festivals.
Your earnings might change, but if at any point your income exceeds the eligibility threshold for your pay period, your employer should automatically enrol you or after three months, even if they choose to delay.
Once you’re enrolled and you decide not to opt-out, your employer will calculate pension contributions each time you get paid based on a percentage table.
It’s important to note that these percentages are applicable to qualifying earnings above £6,240 (or the specified amount for your pay period).
If your income varies, this means there will be times when you earn enough for pension contributions and other times when you won’t meet the threshold, and no contributions will be made.
Can I opt out of auto enrolment pension scheme and rejoin later?
Yes, you can opt out of the auto-enrolment pension scheme, but you can also rejoin later if you choose to. Here’s how it works:
| Opting Out | Rejoining |
| If you decide you don’t want to participate in the auto-enrolment pension scheme, you have the option to opt-out within a month. This means you won’t have contributions deducted from your pay, and your employer won’t make contributions either. Whatever contribution you have already made will remain in your pension pot. | If you opt-out, you can usually rejoin the pension scheme later. Your employer must automatically re-enrol you approximately every three years, but you can also choose to rejoin voluntarily if you change your mind. |
It’s important to keep in mind that while opting out may provide short-term financial relief, it also means you’ll miss out on the benefits of pension savings and employer contributions.
Rejoining later can help you continue building your retirement savings, but you’ll need to take the initiative to do so.
What is the benefit of contributing to an auto-enrolment pension?
If you are auto enrolled in a workplace pension scheme, you can benefit by getting tax relief of 20% on your contributions.
Typically, there are two types of arrangements in Workplace pension scheme for tax benefits:
Net Tax basis (Deducting contributions after tax)
HMRC classifies this arrangement as “relief at source.” Under this system, your contributions are deducted after taxes have been withheld from your paycheck.
Even if your earnings fall below the annual personal allowance threshold of £12,570, you are still entitled to receive tax relief on your pension contributions.
In this process, the pension provider, such as Nest Pension, claims the tax relief at the basic 20% rate directly from the government.
Similarly, if an employee falls under a higher tax bracket, they can subsequently claim the additional relief through their tax return.
For example,
Let’s consider the following scenario:
- Your annual gross pay is £36,000.
- The contribution threshold is £6,240.
- The amount designated for pension contributions is calculated as the difference between your gross pay and the threshold, resulting in £29,760 (£36,000 – £6,240).
- The total contribution to your pension plan is 5% of £29,760, which equates to £1,488.
- Tax relief is applied at the rate of 20% on the total contribution, amounting to £297.6.
- The gross contribution you make, after accounting for tax relief, is £1,190.4 (£1,488 – £297.6).
The pension provider will receive a £1,190.4 contribution from you and claim tax relief of $297.6 from HMRC on your behalf and invest in a pension plan.
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Gross Tax basis (Deducting contributions before tax)
HMRC classifies this arrangement as a “net pay arrangement.” The “gross tax basis,” despite its name according to HMRC, is actually calculated from your gross pay, not the net pay.
This means that employee contributions are deducted from their pay before any taxes are taken out. Consequently, employees automatically receive full tax relief on their contributions right away.
However, it’s important to note that this also means that lower-paid employees who don’t pay income tax won’t receive any tax relief.
Under this system, the pension provider claims tax relief from the government at the basic rate of 20%. This approach streamlines the process of tax relief, ensuring that individuals receive immediate tax benefits on their pension contributions, while those not liable for income tax won’t receive additional relief.
Note: In the above example, the full amount of your pension contribution £1,488, goes from your wages into your pension savings, and this happens before any income tax is deducted.
This contribution reduces your taxable earnings by the same amount, meaning you’re taxed on £36,000 – £1,488 = £34,512.As a result, you pay £297.6 less in income tax, which is 20% of the £1,488 pension contribution (since the basic tax rate is 20%).After accounting for this tax relief, the actual cost to you for contributing £1,488 to your pension is only £1,190.4 (£1,488 – £297.6).This demonstrates how tax relief effectively reduces the cost of saving for your retirement, making it a valuable incentive for pension contributions.
If you are in a higher tax rate bracket, you can claim additional tax relief from the government when you file your income tax return.
This means that if your tax rate is higher than the basic rate of 20%, you can request the additional tax relief you’re entitled to based on your higher tax rate when you reconcile your taxes during the annual income tax return process.
This allows you to maximise the tax benefits associated with your pension contributions.
Can I join a Workplace pension scheme, even if I am not entitled to be automatically enrolled?
Yes, you can join a workplace pension scheme even if you are not entitled to be automatically enrolled. Your eligibility to join the scheme may depend on your specific circumstances.
If you’re not eligible for automatic enrolment, you may fall into one of the following categories:
1.
Disposal expenses & benefits
This category includes individuals aged 16 to 74 who earn between £6,240 and £10,000 (in 2023/24), or those aged 16 to 21 or state pension age to 74 who earn over £10,000.
As a non-eligible jobholder, you have the option to opt into the workplace pension scheme, and your employer may also make contributions to your pension on your behalf.
2.
Entitled Workers
If your income is less than £6,240 (for the year 2023/24), you fall into the category of an “entitled worker.”
As an entitled worker, you have the option to enrol in a workplace pension scheme, but it’s important to note that you won’t receive employer contributions if you decide to participate.
It can be summarised as:
| Category | Age range | Earnings Range | Status | Employer contributions |
|---|---|---|---|---|
|
Non-Eligible Job holder | 16 to 74 | £6,240 to £10,000 | Non-eligible |
May contribute |
| 16 to 21 orState pension age to 74 | Over £10,000 | |||
|
Entitled worker | Any age | Less than £6,240 |
Entitled to join scheme |
No contributions |
What if your employer fails to comply with auto enrolment pension?
If your employer fails to enrol you into a pension scheme when they should have, the following steps may be taken:
Your employer should communicate with you to explain how automatic enrolment applies to them.
You should be enrolled in a pension scheme.
Contributions should be backdated to the day when you first met the age and earnings criteria for auto enrolment pension scheme inclusion to ensure that you do not lose out.
For Contribution Payments, the employer must pay any unpaid employer contributions, and you are responsible for your own contributions unless the employer chooses to cover them.
Employers may have the option to make these payments in instalments, subject to the rules of their specific pension scheme.
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Final Thoughts
In plain terms, the Auto Enrolment Pension scheme is a game-changer for your financial future. It’s all about setting aside money from your paycheck today to ensure you have some financial security when you stop working.
The great thing is that it’s not just for folks with regular jobs; even temporary or seasonal workers can be part of it. This initiative is like a government-backed savings plan that’s open to everyone.
What’s neat is that you have some control. If you need the money now, you can choose to stop saving, but you can also start again when things get better. Even if you’re not automatically enrolled, you can still decide to join this savings club and put money aside for your future.
In a world where the future can be uncertain, the Auto Enrolment Pension scheme is like a safety net. It’s a way to ensure you don’t have to worry about money when you’re no longer working.
So, consider it your financial friend, looking out for you and helping you enjoy your retirement years with some peace of mind.
