Corporate Auto enrolment - the next stage

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Automatic enrolment of employees into workplace pensions has been much more of a success story than predicted.

In the last three years, over 8.5 million people have begun saving for their retirement and almost 800,000 employers have successfully complied with their automatic enrolment duties, according to The Pensions Regulator.

A key factor that helped the initial acceptance of auto-enrolment was the low level of employee contributions.

Now the regime is moving on to the next, more challenging stage.

From 6 April 2018, there will be a big jump in minimum contributions for both employers and employees.

At present the total minimum contribution required is just 2% of band earnings (earnings between £5,876 and £45,000 a year in 2017/18). Of this, the employer must pay at least 1%. So the typical minimum 1% contribution by an employee earning £25,000 a year currently works out at £12.75 a month after basic rate tax relief.

Contribution levels rising

In two weeks, however, the minimum total contribution will rise to 5%, and the employer must pay at least 2% of this total. Most automatically enrolled employees will see their contribution rate triple – from 1% to 3%.

A year later, in April 2019, there will another 3% increase in the minimum total, leaving the employer with a payment of 3% and most employees facing a further increase in contributions to 5%.

Based on this year’s rates (which may change), that £12.75 a month in March 2017 will have increased to £63.75 a month by May 2019.

The choice of April for the increase date was deliberate because it coincides with the likely revisions to the personal allowance and national insurance contributions at the start of the new tax year. Both of these generally boost employees’ net pay and so hide some of the increased deduction from earnings.

If you are an employer, you would be well advised to alert your employees to their contribution increase before it takes effect. You should also ensure you have budgeted for your contribution increases in 2018/19 and then again in 2019/20.

For further advice and information, please talk to us. Our Corporate team help companies with all aspects of running a pension scheme from design and implementation through to scheme governance and member communications.

Suzanne McGowan – Latest Blog Posts

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