Phasing in of Increase in Workplace Pension Contributions
The new regulations, amending the dates the minimum pension contribution increases take place, have now been passed by Parliament – Phase 2 on 6 April 2018 and Phase 3 on 6 April 2019.
So what does this mean for employers and employee’s?
From 6th April 2018, the total contribution from both employer and employee will be 5%, made up as 2% contribution from the employer and 3% contribution from the employee. This is an increase of 1% for the employer and 2% for the employee.
Your minimum contributions and Payroll
Pension contributions are usually expressed as a fixed sum or a percentage of earnings. If they’re expressed as a percentage, you will need to confirm salaries with your pension provider / trustees regularly as necessary from time to time.
You also need to decide what elements of staff pay are used to calculate pension contributions, subject to any overriding legislative requirements, such as in relation to automatic enrolment. You may decide that only basic pay is pensionable but not bonus or overtime payments. Let your pension scheme know what you decide.
If you are processing your own payroll, you will need to make sure your system’s are updated from 6th April 2018 to reflect the new contributions. This may mean you will need to calculate the increase manually if you are using a fixed contribution basis and you need to make sure you are aware if the contribution for the employee is a net contribution or a gross contribution and update your payroll records with the relevant figures.
Tax Relief and Pension Contributions.
There’s often confusion about the two methods for giving tax relief on employee contributions to workplace pension schemes. These are:
- Relief at source: this requires net contributions
- Net pay: this requires gross contributions.
Legislation determines which tax relief method a pension scheme uses (assuming that the member in question is eligible for tax relief). Group personal pensions (GPPs) generally use ‘relief at source’ and occupational pension schemes (OPSs) generally use ‘net pay’. Which method a scheme operates determines how employers must deduct employee pension contributions from earnings when running payroll.
If an employer deducts incorrect employee contributions because it’s used the wrong tax relief basis when running payroll, this leads to rework problems for both the employer and the pension scheme. Getting it right is essential, as these two methods are mutually exclusive. Employers need clarity over whether its pension provider operates ‘relief at source’ or ‘net pay’. The employer must then use the correct method when deducting employee pension contributions via payroll. If an employer uses more than one pension scheme, it may have to operate both methods whenever it runs payroll. It must ensure it uses the right method for each scheme and correctly identifies which employees are members of which scheme. Remember, you need to tell payroll what rate of contribution is due and what earnings to use to calculate contributions.
It is therefore important if you are processing your own payroll to ensure you understand the difference and setup your payroll correctly.
If all of this sounds daunting or you feel you could do with some help or a little support, we would be pleased to help either as a paying client, or just to give you some help and advice at no cost to you.
