Auto enrolment contributions increase: Don’t get caught out!

For tax year 2018/19, one additional task that employers need to be aware of is the increase in statutory minimum pension contributions for auto enrolment.

From 6th April 2018, all employers must ensure they make the necessary adjustments to ensure compliance with the Automatic Enrolment legislation.

How much extra will employers & employees have to pay?

This depends on what salary definition the employer bases their pension contributions on. For example, in most cases employers using basic pay, as pensionable earnings will be required to increase from paying 2% to 3% of employees’ basic pay with employee contributions increasing from 1% to 3%.

However, those employers using the default qualifying earnings basis (currently any earnings between £5,876 and £45,000 per annum) will need to increase from 1% to 2% with the employee contribution increasing from 1% to 3%. To find out what level you must increase to, visit the Pension Regulator website.

What if employees don’t want to increase contributions?

Employers must increase contributions in line with the statutory requirements unless the employee opts out or chooses to leave the scheme. If an employee wishes to continue paying into their pension below the minimum levels, they can do so, however they will not be entitled to employer contributions also.

How many employees will opt out after the increases?

So far under auto enrolment, about 9% of workers have opted out – far fewer than the government expected. That number is likely to rise over the next few years, however in a recent policy paper Royal London argued that wage increases in April will also disguise the extra contributions required.

Therefore, it is essential that employers do not underestimate the cost of this and budget accordingly.

What should an employer do to prepare?

It is important that employers communicate the increases to employees to ensure they are aware of and understand the changes. This will make certain there are no surprises when staff see an increased deduction from their pay.

Employers should also contact either their payroll or pension provider to understand their requirements and ensure they too are also ready for the contribution increases.