This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
Find out more about qualifying earnings and minimum contributions for qualifying schemes
For a scheme to be a qualifying scheme in respect of a jobholder, a quality test must be met. For a scheme that’s wholly money purchase, this involves a prescribed minimum contribution being paid. For a scheme that is wholly defined benefit, this involves a minimum accrual rate being met.
The quality requirement for money purchase schemes means the scheme (or in the case of a personal pension scheme, the employer’s agreement with the provider) must require contributions to be paid at least at a set minimum level.
The minimum level is 8% of the jobholder’s qualifying earnings in the relevant pay reference period, with the employer being required to pay at least 3% of that.
There is nothing to stop the employer paying more than 3%, or even paying the whole 8%.
For the purposes of calculating contributions, an employer can choose one of the following definitions of pay reference periods:
- A period of 12 months, starting on the staging date and ending 12 months later. Subsequent pay reference periods start on the anniversary of the employer’s staging date and end 12 months later
- A period equal in length to the interval between the usual payments of a jobholder’s wages or salary (assuming the scheme allows).
- A period over which the normal wages or salary is paid, aligned with the relevant tax period (assuming the scheme allows).
It’s worth noting that for the purposes of defining a jobholder and the automatic enrolment trigger, the pay reference period is defined differently. Refer to the Pay reference period section of this guide for more detail.
In a pay reference period of 12 months, qualifying earnings are the band of earnings that are above £6,240 and up to and including £50,270 (with proportionate amounts for periods of less than 12 months). These are the figures for 2023/24.
Earnings for this purpose includes:
- salary or wages
- overtime payments
- statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay
Note that benefits in kind are excluded.
Under most money purchase schemes, contributions will not be based on qualifying earnings, but on some other measure of earnings (for example, basic pay). Having to check that the contributions to be paid using such other measure of earnings at least match 8% of the jobholder’s qualifying earnings could be an onerous task for employers. So, legislation allows the employer to certify that the scheme instead meets one of three alternative quality requirements in relation to a jobholder who is an active member of the qualifying scheme. See the section on Certification and the alternative quality requirements in this guide for more information.
Where a jobholder has to pay some of the contribution, their employer must deduct that amount from the jobholder’s pay. In other words, the employer will no longer need explicit authorisation from the individual to do this. A similar right will apply where an entitled worker joins (rather than being auto-enrolled into) an occupational pension scheme.
Where an entitled worker joins a GPP, direct payment arrangements must apply. This means the entitled worker will still have to give their employer written consent before the deduction can be made. No minimum contribution or minimum accrual rate is required for these entitled workers.
Where someone is automatically enrolled, automatically re-enrolled or enrolled, active membership must be made effective from the relevant date (i.e. the automatic enrolment date, automatic re-enrolment date or enrolment date), so contributions/accrual must be calculated based on that date.
Where the jobholder has to contribute to the scheme, the employer must, on or after the relevant date, deduct the contributions payable by the jobholder from their pay.
Contributions deducted during the three-month period starting on the date from which their active membership of the scheme is effective must be passed to the scheme by no later than the 19th or 22nd day of the month following the last day of the three-month period. The 22nd applies where contributions are passed to the scheme by electronic means; the 19th applies in all other cases. This applies to jobholders who become active members of a qualifying scheme (either through automatic enrolment, re-enrolment, opting-in or contractual enrolment) and to entitled workers who have chosen to join their employer’s scheme.
After this three-month period, contributions must be passed to the scheme by the 19th/22nd day of the month following the month in which they were deducted from pay.
Jason is automatically enrolled by his employer on 1 June 2023. His employer will only pay the minimum 3% of qualifying earnings, so Jason has to pay a contribution of 5% (including tax relief). Jason will become an active member of the scheme from 1 June 2023.
He’s paid on the 28th of each month so his first contribution will be deducted from his pay on 28 June. Jason doesn’t opt out of the scheme, so his employer deducts a second contribution on 28 July and the third contribution on 28 August.
All three contributions must be passed to the scheme by no later than 22 September 2023 (assuming they’re paid by electronic means).
The contribution deducted from Jason’s pay on 28 September 2023 will need to be passed to the pension scheme by 22 October 2023 if paid by electronic means, or 19 October 2023 if paid by cheque.
If a jobholder doesn’t want to pay their minimum contributions, they can ask their employer to allow them to continue in the scheme on a lower contribution amount. Any contributions above the minimum which had already been paid will not be refunded. The scheme would no longer be qualifying in relation to the jobholder from the date that the lower contribution rate applies.
Employers are only required to pay the minimum contribution for members of a qualifying scheme, so where a jobholder chooses to cease active membership of a qualifying scheme by paying less than the minimum, the employer is not required to make any contribution, but they can if they want to.
If, at the next cyclical re-enrolment date the scheme is still not a qualifying scheme in respect of the jobholder, and the jobholder is classed as an eligible jobholder at the re-enrolment date, the employer may have re-enrolment duties:
- If the eligible jobholder reduced their contribution below the minimum contribution required more than 12 months before the re-enrolment date, the employer must re-enrol them into a qualifying scheme (i.e. contributions must be increased to meet the minimum requirements).
- If the eligible jobholder reduced their contribution below the minimum contribution required within the 12 months immediately before the re-enrolment date, the employer can automatically re-enrol them into a qualifying scheme if they want, but they don’t have to. Re-enrolling them would mean contributions would have to be increased to meet the minimum requirements.
Cyclical re-enrolment takes place around the third anniversary of:
- The last cyclical re-enrolment date, or
- The auto-enrolment duties start date, if the employer hasn’t already been through cyclical re-enrolment.
At the cyclical re-enrolment date, the jobholder could decide to remain in the scheme and pay the additional contribution. Alternatively, they may decide that they don’t want to pay the increase but want to stay in the scheme paying the same contribution as before. If they want to do this they should speak to their employer to arrange it, instead of opting out. If they opt out, all contributions will stop and active membership of the scheme will cease.
If the jobholder stays in the scheme but pays contributions that are less than the minimum required, they may have to be assessed and potentially re-enrolled again at the next cyclical re-enrolment date.
Note: There are exceptions that apply to some jobholders, meaning that the employer may not need to auto re-enrol them. You can find out more about this in the Pensions Regulator's detailed guidance.