Most workers in the UK are going to be automatically enrolled into a workplace pension scheme by their employer. From the date they’re automatically enrolled they’ll have a month to choose not to join, or ‘opt out’. If they do nothing they’ll be enrolled in the scheme. They’ll make contributions to their retirement pot from their pay for as long as they’re employed or until they take their money out.
Workers and employers can both contribute into NEST to build a retirement pot that’s invested on behalf of the worker. Workers who earn over a certain amount are entitled to a minimum contribution into their pot when they’re paid.
Minimum pension contributions
Minimum contributions are based on what’s known as ‘qualifying earnings’. Qualifying earnings are a section of a worker's pay. For the 2016/17 tax year this is everything over £5,824 and up to £43,000. The qualifying earnings band is reviewed by the government each year.
Workers who earn at least as much as the lower threshold each year are entitled to a minimum contribution into their retirement pot.
The minimum contribution rate itself only applies to a worker’s qualifying earnings. So in the 2016/17 tax year, a worker’s minimum contribution will be 2 per cent of everything they earn over £5,824 but not of anything they earn over £43,000.
How minimum contributions are worked out
The minimum contribution is made up of money from a worker’s pay, money from their employer and tax relief from the government.
Employers can choose a more straightforward way of calculating their minimum contributions if they want to make things simpler. As long as the contribution is at least as much as the minimum, then employers will still be complying with their new duties.
The new employer duties are being introduced gradually. The minimum contribution has been introduced at 2 per cent of a worker's pay. This will rise gradually to 8 per cent. The dates for the increases to 5 per cent and 8 per cent are due to change to April 2018 and April 2019 (as illustrated above), subject to parliamentary approval.