Employers auto-enrolment pension schemes – changes on the horizon?

In the UK, all employees, full-time or part-time, are automatically enrolled into their workplace pension scheme if certain conditions are met.

These conditions include:

1. The ability to work in the UK
2. Earnings of more than £10,000 per annum
3. Not being a member of a qualifying workplace scheme already
4. Being at least 22 years old and not having reached the state pension age.

It is important to note that even if an employee earns less than £10,000 annually (£833 per month), but more than the Lower Earnings Limit (LEL) of £6,240 (£520 per month), they have the right to opt into the scheme and make contributions.

Qualifying earnings on which basic auto-enrolment pensions are calculated are all earnings between £6,240 and £50,270.

What’s included as qualifying earnings?

• Salary
• Wages
• Commission
• Bonuses
• Overtime
• Statutory sick pay
• Statutory parental leave pay (maternity, paternity and adoption pay).

Qualifying earnings thresholds:

The minimum auto-enrolment contribution to an employee’s pension savings, based on qualifying earnings, is 8%.  This currently consists of a 5% contribution by the employee and a 3% contribution by the employer. Some businesses will have schemes that are based on full salary, or with different percentages, but the amount that the business contributes has to be at least that under the minimum requirements of the auto-enrolment regulations.

What are the anticipated changes?

Lower Age Threshold

The minimum age for automatic enrolment will be reduced from 22 to 18 years. This change means that businesses will need to enroll younger employees.  For businesses that have younger team members, this is likely to increase their costs – for example, a 19-year-old on £18,000 per year would now cost the business an additional £353 per year.  Whilst this is good for younger people to start their pension savings, this could also be very costly for small businesses.  

Removal of the Lower Earnings Limit

With the removal of the £6,240 limit, employers and employees will be required to pay in more towards their pension contributions.  The additional employer contributions, based on an extra £6,240 of pensionable salary, equates to an extra cost of £187 per year and for the employee, a reduction in net pay of around £312 per year.

The remaining criteria will largely remain the same, but these two elements alone have the potential to significantly increase the overheads for businesses.

The government’s plan is to have a greater number of the workforce paying into pension from the start of their working career.

However, the question should be asked with the changes anticipated, could it possibly swing the pendulum the other way with employees losing pay and increasing the number of opts out? Only time will tell!

If you have any questions or concerns surrounding the anticipated pension automatic enrolment changes, please don’t hesitate to contact the payroll team here at Lambert Chapman LLP.