NEW JOINER
Lauren is a 23 year old graduate, on a starting salary of £25,000, who joined her company soon after leaving university. She’s never been enrolled in a pension before, and has some questions about their primary benefits.
NEW JOINER
Lauren is a recent graduate who joined ABC soon after leaving university. She’s never been enrolled in a pension before, and has some questions about their key benefits.
What are some key concepts you need to know, and what can you tell Lauren so she’s comfortable about what a pension means for her current and future finances? Auto enrolment
Auto enrolment requires all employers to enrol their eligible workers into a pension scheme and make contributions towards it. This applies to employees aged between 22 and state pension age, who earn more than £10,000 per year. Read The Pension Regulator’s guide to automatic enrolment for more information on how to enrol your staff.
What to consider
Above anything else, it's a legal requirement that all UK employers must auto-enrol certain staff into a workplace pension. Lauren is 23 and earns over £10,000, so she qualifies for auto-enrolment. However, if Lauren decides that she doesn’t want to be part of the pension scheme, she can choose to opt out. As a responsible employer, make sure to highlight the risks of opting out to Lauren as this choice could have large financial consequences for Lauren’s retirement.
How does Lauren's pension work in practice?
A chosen percentage of Lauren’s salary will be directed to her pension via salary sacrifice, and her employer will also contribute. This means that Lauren may have less monthly cash to spend, but can take advantage of money paid into her pension by her employer and the tax relief from the government to save for her pension.
Salary sacrifice
Salary sacrifice is one way of paying into a workplace pension. This is where your employees agree to reduce their salary by an amount equal to their pension contributions i.e. taking their pension contributions out of their gross pay rather than their net pay. The employer then pays the total amount (both the employee and employer elements) as an employer contribution into the pension. Salary sacrifice offers two key benefits for employees:
- No national insurance is payable on their contributions
- No income tax is payable on their contributions
This means they immediately save Income Tax up to the highest rate they pay, subject to HMRC limits. Most importantly, this means there is no need for them to reclaim any further tax relief as this is given automatically. Relief at source
Relief at source is another way that contributions can be made into a workplace pension. This is where contributions will be taken from an employee’s basic salary (after Income Tax and National Insurance are deducted), then sent to the pension provider. Basic-rate tax relief is then automatically reclaimed within the pension. If they pay a higher rate of tax, they would need to claim back any further tax relief from HMRC themselves. Please note: Tax rules change and benefits depend on individual circumstances Contributions
Employees and employers must contribute to a workplace pension scheme. The minimum total amount that must be contributed by an employer and an employee toward a pension is 8% of qualifying earnings. The minimum that an employer must contribute is 3%. Employers can choose to increase their contribution above the minimum as part of their workplace benefits package. Employees can also choose to increase their contribution above the minimum to 100% of their salary or up to £40,000.
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