Auto enrolment: immediate and future changes to pension contributions

The earnings thresholds that many employers use for pensions auto enrolment have changed for the new tax year. This means there is a new ‘qualifying earnings’ (QE) band to use when calculating auto enrolment contributions.

For 2017/18, the qualifying earnings band will be between £5,876 and £45,000 (compared to £5,824 - £43,000 in 2016/17).
 
How will pension contributions be affected? Contributions for some employees could fall, while those for some higher earners could increase, as shown in the following example:

Example 1
 
2016/2017 2017/2018
John earns £30,000
Less the lower QE threshold of £5,824 

= £24,176

x 1% employee contribution = £241.76 per annum
x 1% employer contribution = £241.76 per annum
John earns £30,000
Less the lower QE threshold of £5,876

 = £24,124

x 1% employee contribution = £241.24 per annum
x 1% employer contribution = £241.24 per annum

John’s pension contributions decrease as a result of the new QE band.

Example 2
 
2016/2017 2017/2018
Gill earns £45,000: highest QE = £43,000    
Less the lower threshold of £5,824

= £37,176  

x 1% employee contribution = £371.76 per annum
x 1% employer contribution = £371.76 per annum
Gill earns £45,000: highest QE = £45,000
Less the lower threshold of £5,876

= £39,124

x 1% employee contribution = £391.24 per annum
x 1% employer contribution = £391.24 per annum

Gill’s pension contributions increase as a result of the new QE band.
 
When using the new band and calculating pension contributions, remember that qualifying earnings include salary, wages, overtime, bonuses, commissions, statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay.
 
Prepare for phased increases

The pension contributions that employers – and employees – make under auto enrolment are set to rise substantially from April 2018, when the first phased increase in contributions takes place. These phased contribution increases are necessary because of the Pensions Commission’s calculations for the amount of savings required to help ensure people have a financially secure retirement.

The Pensions Commission estimated that individuals would need 45% of their pre-retirement income at State pension age after 40 year of saving. It also estimated that 30% of the replacement income would come from state benefits, with the remaining 15% from private pension saving under auto enrolment. To reach this level, an average earner would need to save around 8% of their earnings for around 40 years.

So far, auto enrolment has only required annual savings of 2% of earnings. From 6 April 2018, the total saved by each employee in an auto enrolment scheme must be at least 5%, with the employers having to contribute 2% of that, as shown below. Another increase will follow from 6 April 2019.

Contribution levels using qualifying earnings
 
Date Total must be at least Employer must contribute
To 5 April 2018 2% 1%
6 April 2018 to 5 April 2019 5% 2%
6 April 2019 onwards 8% 3%
 
 
It is imperative that employers start to plan early for the increase in pension contributions from April 2018.  Communication with employees is vital and reviewing pension decisions maybe appropriate as each phasing date approaches.
 
If you require further guidance, please speak with your usual Moore Stephens contact.

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