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Are your clients ready for contribution increases?

Do your clients know about the increases in minimum pension contributions?

Make sure they understand how these changes will apply to them and their staff, and prepare for the minimum contributions going up.

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Key points

  • by law, minimum contribution amounts are required to increase at set times
  • the total minimum contribution increased from 2% to 5% of qualifying earnings on 6 April 2018, and rises again on 6 April 2019 to a total minimum amount of 8%. If your client has chosen to use certification, their total minimum contribution rates will also increase on these dates
  • your client and their staff can choose to pay more than the minimum contributions if they wish
  • your client can decide to pay the total minimum contribution, which may mean their staff don't have to make up any shortfall, and may not have to pay into the pension at all, depending on the scheme's rules
  • to remain a qualifying scheme, all automatic enrolment pension schemes with contribution rates that would be below the minimum amount after the rate increases must apply the higher rates
  • if your client operates a defined benefit (DB) scheme, these contribution increases don't apply and they don't need to take any action

What's happening?

By law, on 6 April 2018, your clients must have increased the amount of their minimum contributions into their staff's automatic enrolment pension to at least 2% of qualifying earnings. Members of staff will have to pay the shortfall needed to make the total minimum contribution up to 5%, including your client's contribution.

The minimum contribution levels will rise again on 6 April 2019, with your client paying a minimum of 3% towards the pension, and the total minimum contribution reaching 8% - with staff making up the difference.

Your client doesn’t need to take any further action if they don’t have any staff in a pension scheme for automatic enrolment, or if they are already paying above the increased minimum amounts. These increases don’t apply to staff who asked to be put into a scheme that your client doesn’t have to pay into.

Your client can choose to pay the full amount of the total minimum contribution. This may mean staff do not have to pay in at all, unless the scheme's rules say that they have to make contributions.

Both your client and their staff can choose to contribute more than the minimum amounts to the pension if they want to.

If your client pays in more than their legal minimum contribution, but less than the total minimum contribution shown in the table below, then their staff will need to pay in at least enough to make up the shortfall between these amounts.

The table below shows the minimum contributions that employers who set up a defined contribution scheme for automatic enrolment must pay, and the date when they must increase. This is calculated based on earnings between £6,032 to £46,350 per year (£503 to £3,863 per month, or £116 to £892 per week), and including certain elements of pay.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Old rates, up until 5 April 2018 1% 1% 2%
Currently, from 6 April 2018 to 5 April 2019 2% 3% 5%
6 April 2019 onwards 3% 5% 8%

Your clients may have agreed with their scheme provider to calculate minimum contributions in a different way. If this is the case you will need to apply different increases - details on the increases for these schemes can be found below.

Schemes with different rules on contributions

If your clients already have workplace pension schemes in place which they have self-certified for use with automatic enrolment, they will have different minimum contribution increases to those set out above - depending on the type of scheme.

The new rates for these schemes can be found in the tables below.    

Certification criteria

There are three alternative sets of minimum contribution requirements when using an existing DC scheme for automatic enrolment.

Each set has its own minimum contribution levels based on how pensionable pay is calculated. If your client's scheme doesn't meet the criteria in any one of these sets, then it can't be used for automatic enrolment.

The tables below show the stages of contribution increases for each of these sets:

Set 1: contributions calculated on gross earnings

Your client calculates contributions based on gross earnings. They don’t include bonus, overtime, commission or certain staff allowances (such as shift pay or relocation allowance) in the calculation.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Old rates, up until 5 April 2018 2% 1% 3%
Currently, from 6 April 2018 to 5 April 2019 3% 3% 6%
6 April 2019 onwards 4% 5% 9%

Set 2: contributions calculated on gross earnings based on at least 85% of total earnings

Your client calculates contributions based on gross earnings. They don’t include bonus, overtime, commission or certain staff allowances (such as shift pay or relocation allowance) in the calculation. Your client will have checked that the gross earnings used to calculate contributions for all staff in the scheme when added together were at least 85% of their total earnings.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Old rates, up until 5 April 2018 1% 1% 2%
Currently, from 6 April 2018 to 5 April 2019 2% 3% 5%
6 April 2019 onwards 3% 5% 8%

Set 3: contributions calculated on all earnings

Your client calculates contributions based on all elements of staff pay and all earnings.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Old rates, up until 5 April 2018 1% 1% 2%
Currently, from 6 April 2018 to 5 April 2019 2% 3% 5%
6 April 2019 onwards 3% 4% 7%

Considerations for self-certified schemes

If your clients have used certification to allow an existing scheme to be used for automatic enrolment, then it's possible that the certification period may include one or both of the increases in the minimum contribution levels. If they still need help, your clients should check their scheme rules and speak to their pension provider or payroll provider.

The scheme rules or terms and conditions will need to reflect the increases in the minimum contributions, and your client's payroll will need to be ready to calculate and deduct the increased amounts.

The Department for Work and Pensions has produced guidance for employers on the process of certification, including a template of the certificate. This template includes a statement that the employer certifies at the old minimum up to 5 April 2018, and then at the increased minimum rates from 6 April 2018 and 6 April 2019.

Alternatively, your clients could have chosen to certify at the higher increased amounts for the whole certification period. In this case there will have been no need for their payroll to make a change on 6 April 2018 (or 6 April 2019, if they chose to certify at those rates), as the contributions will already have been calculated and deducted over the increased minimum contribution rate.

If the employer has not done either of these, then they may need to end the certification period and re-certify from 6 April 2018 with the correct total minimum contribution.

Supporting your clients with the increases

The increase in minimum contributions should be simple to do, but your clients need to think about the increases now, implement the 6 April 2018 rates if they haven't already done so, and plan ahead for when the 6 April 2019 rates come into effect.

We recommend that your client checks with their payroll provider to make sure that they're ready to calculate and deduct the increased contributions - if they're not prepared for the increases, the right amount may not be paid across to the scheme on time.

It's important that their workplace pension schemes and payroll software can support the contribution increases, otherwise the right contributions might not be deducted at the right time, and the schemes used by your clients may no longer be qualifying schemes for automatic enrolment.

Pension schemes should already be making necessary changes to support the increases, and will communicate this, but it's still your client's responsibility to make sure they're using a qualifying scheme for their automatic enrolment duties, and that the right amount of pension contributions are deducted.

Your client's scheme may be able to support them with communications to staff - your client should contact their scheme provider to find out what help may be possible.

We recommend that your clients write to their staff to let them know about the increase in contributions, and we have letter templates available to help them do this.

Changes to scheme rules

Ensuring the pension scheme is qualifying

Most pension schemes should already be making arrangements for the scheme rules to allow for the increased minimum contributions. In some cases the scheme contribution rates may already be above the minimum required, so no change is necessary.

Pension providers should change the scheme rules and governing documentation for your clients if their scheme requires contributions at the current minimum amount, and the rules don't reflect the increased minimums.

If their scheme doesn't support the increased contributions, your clients should speak to their pension provider about amending the scheme rules to allow the new rates.

Employer consultation

If your clients want to change their pension scheme’s rules or terms and conditions to increase contributions from staff in the scheme, normally they would need to consult with the staff affected.

If changes are needed as a result of the increase in the minimum contributions required by law, then the scheme's trustees and providers will let your clients know whether existing scheme members need to be consulted about the change to their contribution rates.

Ensuring the correct contributions are deducted

It's vital that your client's payroll is ready to deduct the increased minimum contributions from 6 April 2018, when they rise again on 6 April 2019, and knows when and how much to deduct.

If your clients use an outsourced payroll service, they should check with them that they're ready for the increases, and make sure they know when to deduct them.

If they do their own payroll in-house, they need to be certain that their software is ready for these increases. In order to avoid any problems, they should speak with their payroll provider so they know how to make the changes required to their payroll system.

If you run payroll for your client, you should make sure that the contributions increases have been put in place correctly, including for the first payroll run where the new rates may take effect part way through the pay period. 

Pro-rated contributions

It's possible that the increases will take place part way through a worker's pay period. This is especially the case if your client has chosen to use certification, or if the scheme rules or terms and conditions use qualifying earnings as the definition of pensionable pay, and the pay reference period is not the one aligned to tax weeks or months.

For example, your client could have a pay period of 1 to 30 April, with the increases effective from 6 April.

This means that an increased pro-rated pension contribution deduction may be required for a pay period which includes 6 April 2018 or 6 April 2019. In these circumstances, the contribution for the pay reference period up to 6 April would be calculated based on the old rates, and from 6 April up to the end of the pay reference period being based on the new rates.

If your client's payroll does not process pro-rated contributions, they should talk to the pension provider and payroll provider, and agree how best to deduct, and pay over to the scheme, the amount due.

They may decide to apply the increased rate for any pay period that includes 6 April 2018, even if the pay date is before this date. This would work in the same way for the 6 April 2019 increase.

Staff should know what is happening

When a member of staff was first automatically enrolled, the letter they received from the employer will have set out that contribution levels will increase over time.

Your clients aren't legally required to write to staff again about the increase in contributions, but we recommend that they do, and we have an example letter template that your clients can amend:

This letter is also available in a number of other languages if English is not the first language of your client's staff.

Your clients should still consider the need to consult their staff if they decide to increase the minimum contribution levels before the 6 April 2019 increase.

Pension schemes may be able to help by writing to your clients' staff to let them know what is happening. If your client would like help from their scheme with this they should contact them to find out what's possible.

What letters are sent to my clients from TPR?

The Pensions Regulator (TPR) sends out letters to employers to support them with their automatic enrolment duties. Letters sent regarding the minimum contribution increases can be found below. 

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