Auto-enrolment costs and contributions

One of the main questions around auto-enrolment from employers is “How much will it cost”? As the new auto-enrolment rules mean that employers have to provide and contribute to a workplace pension scheme, it’s unavoidable that auto-enrolment will have a financial impact on your business.

Overview of costs that you will need to consider

It’s worth shopping around to find the best deal for your business and thinking not just about the cost of auto-enrolment, but also about long term value.

Pension contributions

As part of your auto-enrolment duties, you will have to set up and pay into pensions for all your employees who meet the relevant criteria.

How much you’ll need to contribute will depend on the type of earning you use to calculate contributions. The minimum amount you’d need to contribute would be 1% per employee, rising to 3% by 2019.

Pension provider

The costs and on-going charges associated with setting up and running a workplace place pension scheme will vary widely depending on the pension provider that you choose. The level of service and the support package that you receive from your pension provider should be reflective of the amount that you’re paying to set-up/run your pension scheme.

When looking at theses charges, you might want to factor in how much time you’ll be able to spend on automatic enrolment duties and whether they could be reduced by choosing a provider with a more comprehensive auto-enrolment package.

Payroll provider

There will be additional payroll duties involved in running your new workplace pension scheme. If you use payroll software, you’ll need to check whether it has the functionality to complete auto-enrolment tasks, such as assessing your employees’ eligibility to be auto-enrolled. If you need to upgrade your payroll software, there could be a small charge.

If you outsource your payroll to a payroll bureau service, they may be able to help with the day-to-day tasks involved in running your pension scheme. This may be included in your current payroll providers’ charges, but some providers will charge extra for these services.

Financial advice

You might feel that you need the services of an independent financial adviser to offer support and expertise to help you through auto-enrolment. The cost of financial advice will vary widely and be dependant on the level of advice and support that you require.

If you don’t already have a financial advisor, you can find one at www.unbiased.co.uk.

Communications

As part of ensuring that your pension scheme is compliant, there will be a range of regulatory communications that you’ll need to send out to your employees.

Some pension providers will provide software that can issue these communications for you. You’ll need to check if this is a service offered by your pension provider or consider the time and money involved in producing auto-enrolment communications.

Your payroll provider may also offer additional software which will generate the relevant communications after carrying out any assessment. That software may also be able to connect directly with the software needed to run your scheme. Please contact the provider if you need any further information about the software they offer.

Staging late?

If you’ve missed or are likely to miss your staging date, then it is important to get in touch with The Pensions Regulator as soon as possible, to let them know that you’re aware that there’s an issue, and tell them what you’re doing about it. The Pensions Regulator will work with and educate employers who approach them and let them know that they will have difficulty meeting their auto-enrolment duties.

If you miss your staging date and there is evidence you are avoiding your auto-enrolment duties, then you are liable to be fined by The Pensions Regulator. These fines start at a flat £400. They can also impose an escalating penalty between £50 and £10,000 per day, depending on the size of your company

How much does an Aviva workplace pension cost?

At Aviva, we charge a monthly on-going fee of £30-£50 per month to run your workplace pension scheme. This is referred to as an “employer pension charge”. In return for this fee, we provide a software and support package that will help you with the administration involved in running your pension scheme.

We don’t charge set-up fees.

Contributions

“Pension contributions” refers to the percentage of an employee’s salary that is contributed to their pension. By law, you will need to make pension contributions for certain employees each month that meet the minimum contribution levels set for auto-enrolment.

Minimum pension contributions

The minimum pension contributions that you will need to make will gradually increase between now and April 2019, as shown in the tables below. You can choose to pay higher pension contribution levels if you wish, but you can’t pay less.

It’s your decision as to which type of earnings you use to calculate contributions - this will alter the minimum contribution levels rates that you need to pay.

There are minimum employer pension contributions and minimum total pension contributions. In most cases, the employee pension contributions will make up the difference between the two amounts. However, it’s not a requirement of auto-enrolment that employees have to contribute to their pension. If as an employer you paid the entire minimum total pension contribution, your employees would be under no obligation to pay in additional contributions.

Calculating pension contributions

It’s important to check that what you’re proposing is in line with The Pension Regulator’s most up-to-date figures, but the sums here should be linked to the minimum levels needed for certification (the level they’ll be at until April 2018):

There are four different types of earnings that you can use to calculate pension contributions.

Contributions based on qualifying earnings

Also known as banded earnings, qualifying earnings are the portion of an employee’s earnings which can be used when calculating contributions for auto-enrolment. For 2017/2018, qualifying earnings are set between £5,876 and £45,000. This means that the first £5,876 of an employee’s salary wouldn’t have pension contributions deducted. So, if an employee has an annual salary of £20,000, you’d only use £14,124 of their salary for the calculation.

Dates Now until 5th April 2018 6th April 2018 to 5th April 2019 From 5th April 2019 onwards
Employer contributions
1%
2%
3%
Total contributions
2%
5%
8%

Example: Ben Gibson, a sales employee, has a total annual salary of £41,000. His employer decides to base his contributions on qualifying earnings.

Basic pay: £35,000
Overtime: £5,000
Sales bonus: £1,000
Total pay: £41,000

Basic pay:
£35,000 a year
+

Overtime:
£5,000 a year
+

Sales bonus:
£1,000 a year
=

Total pay:
£41,000 a year

Ben’s minimum pension contributions for 2017/2018

As Ben’s employer is using qualifying earnings to calculate pension contributions, £5,876 is deducted from Ben’s salary before the percentage that needs to be put into his pension is worked out.

Ben’s qualifying earnings = £35,124

(£41,000 (total pay) - £5,876 = £35,124))

Minimum employer contribution (1%)

£351.24 a year
(1% of £35,124 (qualifying earnings)).

Minimum total contribution (2%)

£702.48 a year
(2% of £35,124 (qualifying earnings)).

Other pension contribution types

Set one (basic pay)

If you calculate pension contributions based on basic pay, you will only use an employee’s contractual and statutory payments. Additional payments such as overtime, commission and bonuses are to be excluded if you are using set one pension contributions.

Dates Now until 5th April 2018 6th April 2018 to 5th April 2019 From 5th April 2019 onwards
Employer contributions
2%
3%
4%
Total contributions
3%
6%
9%

Example: Ben Gibson, a sales employee, has a total annual salary of £41,000. His employer decides to base his contributions on Set one (basic pay).

Basic pay: £35,000
Overtime: £5,000
Sales bonus: £1,000
Total pay: £41,000

Basic pay:
£35,000 a year
+

Overtime:
£5,000 a year
+

Sales bonus:
£1,000 a year
=

Total pay:
£41,000 a year

Ben’s minimum pension contributions for 2017/2018

Using this option, the contributions will be only calculated on the basic pay. Ben’s overtime and sales bonus wouldn’t be taken into account

Minimum employer contribution (2%)

£700 a year
(2% of £35,000 (basic pay)).

Minimum total contribution (3%)

£1050 a year
(3% of £35,000 (basic pay)).

Set two (pensionable pay)

Pensionable pay refers to any income that is eligible for pension deductions. It can include any other payment or benefit that is outlined as being pensionable in an employee’s contract of employment.

To use set two contribution levels, the employees’ pensionable pay needs to be:

  • Higher than basic pay – benefits such as a bonus may be classed as pensionable and used when calculating pension contributions.
  • BUT less than total pay. This will occur when some of an employee’s benefits are classed as pensionable but not others. For instance, a contract of employment may include bonus payments under pensionable pay but exclude all overtime payments.
  • AND over 85% of the total amount an employee earns.
Dates Now until 5th April 2018 6th April 2018 to 5th April 2019 From 5th April 2019 onwards
Employer contributions
1%
2%
3%
Total contributions
2%
5%
8%

Example: Ben Gibson, a sales employee, has a total annual salary of £41,000. His employer decides to base his contributions on Set two (pensionable pay).

Basic pay: £35,000
Overtime: £5,000
Sales bonus: £1,000
Total pay: £41,000

Basic pay:
£35,000 a year
+

Overtime:
£5,000 a year
+

Sales bonus:
£1,000 a year
=

Total pay:
£41,000 a year

Ben’s minimum pension contributions for 2017/2018

Ben’s pensionable pay = £36,000

(£35,000 (basic pay) + £1000 (bonus) = £36,000))

It is more than basic pay, less than total pay and more than 85% of total pay so this option can be used

Minimum employer contribution (1%)

£360 a year
(1% of £36,000 (pensionable pay)).

Minimum total contribution (2%)

£720 a year
(2% of £36,000 (pensionable pay)).

Set three (total pay)

Total pay is 100% of an employee’s earnings, including any commission, bonuses, overtime and so on.

Dates Now until 5th April 2018 6th April 2018 to 5th April 2019 From 5th April 2019 onwards
Employer contributions
1%
2%
3%
Total contributions
2%
5%
7%

Example: Ben Gibson, a sales employee, has a total annual salary of £41,000. His employer decides to base his contributions on Set three (total pay).

Basic pay: £35,000
Overtime: £5,000
Sales bonus: £1,000
Total pay: £41,000

Basic pay:
£35,000 a year
+

Overtime:
£5,000 a year
+

Sales bonus:
£1,000 a year
=

Total pay:
£41,000 a year

Ben’s minimum pension contributions for 2017/2018

For this option the contributions will be calculated on the total pay, his overtime and sales bonus would be taken into account.

Minimum employer contribution (1%)

£410 a year
(1% of £41,000 (total pay)).

Minimum total contribution (2%)

£820 a year
(2% of £41,000 (total pay)).

You can pay more than the minimum pension contributions levels, but you can’t pay less. You need to meet the minimum levels in order to meet auto-enrolment requirements.