Workers and employers can both contribute into NEST to build a retirement pot for the worker. The new duties mean you’ll need to make at least a minimum level of contributions on behalf of some or all of your workers.
Any worker who earns over the lower threshold for qualifying earnings is called a ‘jobholder’. You’ll have to make a minimum contribution into their retirement pot every time they’re paid.
Workers earning less than the lower threshold of qualifying earnings are called ‘entitled workers’ or ‘workers without qualifying earnings’. For these workers, you don't have to make a minimum contribution, but you can if you want to.
What are qualifying earnings?
Qualifying earnings is a band of gross annual earnings that can be used to work out what contributions a worker should get. It includes a worker’s salary, wages, overtime, bonuses and commission, as well as statutory sick, maternity, paternity or adoption pay.
For the 2016/17 tax year it’s anything over £5,824 and up to £43,000. The figures are reviewed every year by the government and usually change.
How much is the minimum contribution?
The legal minimum for jobholders is currently 2 per cent of their qualifying earnings. Of this, you need to pay at least 1 per cent. The remainder comes from your workers’ pay – which you'll have to collect and send to NEST - and tax relief from the government. NEST will claim the tax relief on your workers’ behalf.
You can pay more if you want to. Some employers pay all of their workers’ minimum contribution or pay additional amounts on top of the minimum. This is a good way of attracting and keeping good workers in your organisation.
Minimum contributions are increasing gradually over the next few years. By April 2019, the combined minimum contribution rate for qualifying earnings will have gone up to 8 per cent of which you must pay 3 per cent.
Find out more about minimum contributions
Limit on contributions
Currently NEST has a cap on the total amount that can go into a worker’s retirement pot in a tax year. This is called the annual contribution limit. It means that no more than £4,900 for 2016/17 can be paid into a worker’s NEST retirement pot. This includes worker contributions, your contributions and any tax relief.
If you and your workers both pay the minimum contribution based on their qualifying earnings, you won’t be affected by this limit.
From 1 April 2017 the limit will be removed completely. So when the time comes for minimum contributions to go up, there’ll be no restrictions on how much can go into a worker’s NEST pot. However members may pay additional tax on contributions that go over the annual allowance set by the government. Most members won’t go over this amount.
Find out more about the government’s annual allowance on pension contributions
Working out minimum contributions
The minimum contribution is a percentage of a worker’s gross annual earnings that fall within the qualifying earnings band.
For the 2016/17 tax year this means that the first £5,824 of their earnings isn’t included in the calculation. For example, if a worker earned £20,000 in 2016/17 their qualifying earnings would be £14,176 and their annual minimum contribution would be based on that.
Because you pay contributions every time you pay your workers, you’ll need to work out qualifying earnings for each pay period and make your contribution based on these amounts. There may be pay periods when workers don’t earn enough to qualify for a minimum contribution.
The table below shows the lower and upper levels of qualifying earnings for some commonly-used pay periods. You’ll need to make a contribution based on everything they’re paid over the lower level and up to the upper level.