Currently employers and employees each contribute a minimum of 1% to a workplace pension. From October 2018 it is intended that the minimum joint contribution will be 8% of qualifying earnings of which the employer will pay 3%.
What are qualifying earnings?
In terms of workplace savings, qualifying earnings includes all elements of pay, that is to say not only basic salary/wages but also overtime and extra payments such as bonuses and commission. It also includes certain benefits such as statutory sick pay and statutory maternity/paternity pay. This is different from what has previously been standard practice in pension schemes, where only base salary has been used to determine contributions. This is part of the reason why it’s important to check that any scheme used is in compliance with these new requirements.
What about other forms of payment such as a car allowance?
As a broad rule of thumb if a payment is made based on grade then it counts towards qualifying earnings, whereas if it’s reimbursement for an expense then it does not. For example senior employees may be given a car allowance due to their status; this is counted towards qualifying earnings. The sales team however often use their cars to travel to appointments and are given a car allowance based on their mileage. This is considered a reimbursement of expenses and is not. Each situation must be looked at individually and if necessary advice should be sought.
What are the limits on qualifying earnings?
Qualifying earnings are broadly in line with the lower and upper earnings limits for National Insurance contributions. This means that at current time qualifying earnings are all earnings above £5,772 and below £41,865. Although there is no guarantee that the definition of qualifying earnings will change in line with changes to National Insurance, it is expected that they will be raised every year.
What is a pay-reference period?
In simplest terms a pay-reference period is the employee’s standard pay period. If an employee is paid on the same day every month then their pay-reference period is from the day after their previous pay date to the day on which they are paid (e.g. 29th March to 28th April). If they’re paid weekly on Fridays for all work done since the previous Saturday then their pay-reference period is Saturday to Friday. It should be noted that when eligibility is calculated according to what is paid during the pay-reference period rather than when the money was earned. For example if employees who are paid weekly receive a one-off bonus relating to the sales over the run up to Christmas and start of January then this will still count toward their earnings in that pay-reference period and may cause them to be flagged as eligible. This is why postponement can be used to help to cancel out the effect of spikes in earnings. Similar comments apply to back-pay.
When do I need to pay contributions?
This will need to be agreed with your pension provider as will the method of paying contributions. From a legislative perspective the key point is that you meet the minimum level of contributions for all eligible employees (except those who actively choose to opt out).
What do I need to know about postponement?
Employers are allowed to postpone the enrolment of employees for up to three months from the point at which the employee becomes eligible for auto enrolment. This can either be done to cancel out the effect of a spike in earnings such as an annual bonus payment or to help with administration, for example aligning enrolment with payroll.