Despite the company pension typically being the most expensive employee benefit a company offers, many employers have not reviewed their arrangements since they first started to auto-enrol employees. The pensions market in the UK is rapidly evolving, with many insurers now offering lower charging products with a greater investment choice to employees.
Company pensions typically have a lot of variations that many people are unaware of and by altering the set up of the pension scheme, it can make a considerable difference to the company's bottom line and the employees' pockets!
Salary sacrifice allows payments into the pension to be made before tax and national insurance is deducted. This not only saves both the employee and the employer national insurance, but also means that employees can obtain tax relief at their highest rate at source. Some employees can also benefit from lower tax rates and tax bills by reducing their underlying income.
Net pay arrangements work in a similar way to salary sacrifice arrangements. However, whilst the payments are still made into the pension before tax is deducted, national insurance is still applied for both the employer and employee.
Relief at Source
Relief at source is the method typically used as the default for a number of pension arrangements. The employee payments are paid into the pension after they have already suffered income tax and national insurance deductions. Whilst the payments receive tax relief in the pension, the national insurance contributions are unable to be reclaimed.
This is typically the default for many schemes. However, many people aren't aware of how this is calculated. Qualifying earnings are calculated based on the national insurance thresholds. Employees do not receive pension contributions up to the lower earnings threshold (£6,240 in 2021/22). Nor do they receive contributions above the upper earnings threshold (£50,270 in 2021/22). This can be contradictory to a lot of employment contracts which may state that employees receive pension contributions on their full salary.
Basic Pay (Tier 1)
Tier 1 pensionable earnings must be equal to or more than the worker’s basic pay. This is a worker’s pay from the first pound. It generally excludes overtime, bonuses and commission.
Pensionable Pay (Tier 2)
For tier 2, total pensionable earnings of all workers must be at least 85 per cent of their total earnings. Total earnings means everything paid to a worker including salary, commission, bonuses and overtime, performance related pay and any other earnings you have paid the jobholder. It also includes statutory sick, maternity, paternity and adoption pay. The pensionable earnings must be equal to or more than the worker’s basic pay.
Total Pay (Tier 3)
Tier 3 includes all earnings in pensionable earnings, which means you need to include wages, commission, overtime, bonuses, performance-related pay and any other earnings you’ve paid the jobholder.
The minimum required contributions differ depending on which scheme type is selected as set out in the table below:
Minimum Employer Contribution
Minimum Total Contribution
There are a number of providers who offer Qualifying Workplace Pension Schemes. Some have limited fund availability, whereas others might have a large fund range to pick from. Some charge the maximum allowable (0.75% of each employee's fund value), whilst some charge significantly less.
Which blend of the above factors is best for the employer and the employee will be different depending on the demographic of the workplace.
Our pension service is based on a monthly retainer whereby we will regularly advise you as the employer on the tax treatment of the pension, the type of pay used to deduct contributions, and the provider, depending on what is best for the employer and the employee. All changes will be communicated with the employees, which we aim to carry out seamlessly.
Call us today to find out how we can make your company's pension scheme work for you and your team