Auto-enrolment contributions
There was a major change recently in the way contributions work and basically, any employee will automatically contribute to a workplace pension, in addition to it, the employer must contribute too. Employees can opt out of the new contribution scheme if they choose to, but keep in mind that the enrolment is automatic every three years.
How does the new contribution scheme work?
This is a new scheme that allows workers to start paying for a workplace pension from your salary, there’s a bonus which is that the employer and government will also be making contributions. The age threshold to access this pension is 55 years old and until the employee reaches that age, the funds will be held by a pension provider.
How much does the employee have to contribute to the workplace pension?
Income is the first determining factor here, so since it’s proportional to income, means that the more you earn, the more you contribute. Currently, auto-enrolment is for people earning a minimum of £10,000.
Keep in mind that even though you and your employer can contribute more if you are above the threshold of £10,000. The employer, however, cannot establish higher rates that make the employee to lose interest in contributing to a workplace pension.
The contribution is made solely by the employer and employee?
No, the government will also contribute to it. The additional deposit from the government is known as tax relief, which means that you get a refund of the tax that the employee originally paid at the usual rate that every employee knows. Employees need to pay attention to this as sometimes the employees would have to claim the tax relief after a self-assessment tax return.
What about salary sacrifice?
Employers can opt to pay pension from the salary before any tax is deducted, this is called “salary sacrifice”. Now, since the contribution is made before tax and NI are deducted off your salary, the government gives you those savings back. This means that a basic taxpayer will receive a 20% income tax, plus 12% from NI contributions back.
Who can access workplace pension:
Since it’s automatic, chances are that you are already enrolled. The government criteria for this is: any person between 22 and 65 and 63 – 65 for men, 63 for women-, earning more than £10,000 from one work source who is employed in the UK. The self-employed and one-man companies are excluded from this scheme.
If you fall outside this requirements you can also choose to have a workplace pension in the event that your employer offers one and you are 21. Government plans for this scheme include extending age limit starting at 18 years old, as a way to encourage younger persons to care for their pension. None of these possible changes can take place before 2020.
The minimum amount a person has to earn in order to be eligible for this scheme is £5,876/year, however, some government spokespersons have opened up the possibility to entirely remove the lower earnings limit. This would mean that you will be eligible for auto-enrolment regardless of income. This is going to be beneficial for many people that have multiple jobs with earnings below the threshold.
Many decisions are yet to be made regarding this new scheme and that means that the decision-making process for this can be stressful. Don’t be afraid to reach out for financial guidance to make better, well-informed decisions that relate to vital aspects of your adult life, like retirement and pension. Trust our team of professionals who can provide the best guidance so you have all basis covered and enjoy peace of mind.
