PENSIONS - 14.03.2019

A pay rise or a pay cut in April?

What happens in April?

In April 2019 we reach the final stage of auto-enrolment that began in 2012. For pay periods that begin on or after 6 April 2019 the total level of contributions must be:

• 8%, of which the employer must contribute 3% (it’s 2% currently so that’s £100 per year extra per £10,000 salary); or
• in a Tier 1 certified scheme, 9%, of which the employer must contribute 4%. A Tier 1 scheme is where contributions are based just on basic pay, holiday pay and statutory payments.

Pro advice. Information recently distributed by The Pensions Regulator indicates that employees must contribute 5%. That isn’t the case, it’s perfectly acceptable for the employer to pay the full 8%, which of course is what happens in a salary sacrifice as there are no employee contributions.

Do you have to tell employees?

No, you don’t unless you feel it would avoid queries when they get their April payslips. But you could develop some questions and answers as follows:

Do I have to accept the increase in contributions? No, you can opt out of pension saving at any time but if you do you will lose the 3% employer contribution plus the 20% contribution from the government. Note. Not everybody gets the 20% contribution (see the low earner trap) and for some pension schemes that also means losing any life insurance cover that is part of the scheme.

Is it a straightforward 3% cut in net pay? No, because everyone gets a government-sponsored pay rise because the personal allowance is going up to £12,500 and the minimum wage is increasing, which will offset the increase for some employees.

Does it work the same in final salary schemes? No, they are based on length of service and salary when you retire. The contributions are often structured very differently.

Do I have to do anything before April? No, the increase for both the employer and employee will happen automatically.

Can I revert to what I was paying in March? Possibly, come and talk to us if that is what you need to do, and we’ll discuss that within the business and with our pension provider.

The low earner trap

There’s currently an issue for low earning employees who have been offered membership of a pension scheme that operates net pay arrangement (NPA) tax relief. Most public sector pension schemes operate this way and some other private sector providers do too. In an NPA scheme the employee’s pension contributions are deducted from taxable pay, so offering tax relief through the payroll at the employee’s highest marginal rate, i.e. 45% in England, Wales and Northern Ireland and 46% in Scotland. However, individuals who earn more than £10,000 p.a. but less than £12,500 p.a. (from 6 April 2019) aren’t taxpayers so they don’t receive any tax relief on their pension contributions and aren’t allowed to claim it from HMRC. If the same employees were members of a pension scheme offering tax relief under the relief at source method, the pension provider would claim 20% tax relief from HMRC even if they weren’t taxpayers and add that to their pension savings. Of course, employees have no choice about which provider is selected on their behalf by the employer and therefore no choice on the method of tax relief.