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Employer pension contributions: Everything you need to know

Should i trust my financial advisor about my pension?

Navigating the world of employer pension contributions can feel overwhelming, filled with questions on automatic enrolment, pension providers, and your minimum contribution.

But don’t worry, we’re here to guide you through it. Whether you’re an employer setting up a workplace pension scheme for the first time or an employee curious about what contributions mean for your future, this blog will clear things up so you can confidently move forward.

This guide covers:

How much you must contribute

Perhaps the most common question employers ask is, “How much do I have to contribute?” Let’s take a look.

Your minimum employer contribution

Knowing the minimum contribution rates is essential for employers navigating the workplace pension scheme. These rates are part of the automatic enrolment requirements, ensuring eligible employees receive a baseline pension savings level.

The minimum contribution to a pension pot is 8% of the employee’s qualifying earnings, with at least 3% coming from your employer contributions. This framework ensures that employees are supported in building their pension fund, with both employee and employer contributing to their future financial security.

Automated payroll

Integrating automatic enrolment into your automated payroll system simplifies the process of managing employer pension contributions.

This setup automatically calculates and deducts contributions based on the employee’s salary, ensuring timely and accurate payments to the pension provider. For employers, this means less manual oversight and a streamlined process that complies with legal requirements, ensuring that contributions to benefit schemes are managed efficiently.

Who you must enrol

Workplace pensions legislation requires the enrolment of all eligible employees into a pension scheme. Eligibility criteria include being aged between 22 and the pension age, earning above a certain threshold (currently £10,000 per year), and working in the UK. This automatic enrolment ensures that a broader range of workers can access pension benefits, contributing towards a secure financial future.

When you must pay your contributions

Paying pension contributions on time is not just a matter of compliance; it’s a cornerstone of trust between employers and employees.

By law, you must ensure that contributions deducted from an employee’s pay must reach the pension fund by the 22nd day of the month following deduction (or the 19th if paying by cheque) (The Pensions Regulator).

Keeping payment information and records

Accurate record-keeping is foundational to managing employer pension contributions effectively. Employers are required to maintain detailed records of contributions for six years, ensuring transparency and accountability. This practice facilitates correct contribution calculations and provides a clear audit trail in case of disputes.

The ‘wholly and exclusively’ test

When it comes to getting tax relief on employer pension contributions, there’s an important rule called the ‘wholly and exclusively’ test. This rule is straightforward: if you, as an employer, are putting money into a pension scheme, it needs to be purely for business reasons.

Simply put, the money you contribute should make sense for the employee’s job.

HMRC generally agrees that employer pension contributions pass this test, meaning you can get tax relief on these contributions. But, if it looks like you’re contributing to a pension for reasons not related to work, you might not get this tax benefit. This is especially true if the contributions are for someone closely connected to you or the business.

However, there are clear situations where pension contributions will always be considered a legitimate business expense:

  • If they’re part of a salary or bonus swap deal, where the employee has agreed to take less pay in exchange for pension contributions. This is because the salary or bonus they gave would have been tax-deductible.
  • Suppose the contribution is the same for everyone, like a matching 5% contribution. This shows it’s a standard part of your employment package, not something special for specific individuals.
  • If you’re contributing to a pension because the law says you have to, like when a defined benefit pension scheme is closing, you must ensure it has enough money to meet its promises.

In all these cases, the contributions are clearly for the benefit of the business and its employees, making them a solid part of your company’s financial planning.

Safegaurd your future with Spencer Churchill Claims Advice

Navigating employer pension contributions and workplace pensions is critical to modern business management. With an understanding of minimum contributions, automatic enrolment, and tax relief, employers can ensure compliance, foster employee loyalty, and contribute to the long-term financial well-being of their workforce.

For employees, knowing your employer’s responsibilities is essential to ensure you are getting what you are entitled to.

Are you concerned you’ve received misleading pension advice from an external party? You might have been mis-sold a pension. Reach out to our team today – we will take the time to understand your story entirely, and if you have a valid mis-sold pension claim, we will do everything we can to ensure you get back what is rightfully yours.

Mk Hk
13 March 2024
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