Changing the basis to calculate a minimum pension contribution

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For employers only

You may remember the final phased increase in auto-enrolment minimum contributions for qualifying pension schemes took place on 6 April 2019. Employers and employees who were paying less than the minimum were required to increase the contributions being paid in order to comply with the auto-enrolment rules. We put together a helpful webpage where you can find more detail around phasing.

There are a number of ways to calculate the minimum contribution required for qualifying schemes:

  • You can use the band of qualifying earnings (this is called the relevant quality requirement), or
  • choose one of the three alternative quality requirements set out in the legislation.

If you’re using an alternative quality requirement, you need to record that this is what you’ve done by certifying your scheme.

The relevant quality requirement and the alternative quality requirements are:

Relevant quality requirement

Total contributions of at least 8% of the employees qualifying earnings as set out in the legislation (including an employer contribution of at least 3%) for each relevant employee in the scheme.

Qualifying earnings are defined as the band of earnings between £6,136 and £50,000 (2019/20 figures), made up of the following components of pay: salary, wages, commission, bonuses, overtime, statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay.

Set 1

Total contributions of at least 9% of the employees pensionable earnings (including an employer contribution of at least 4%) for each relevant employee in the scheme.

Pensionable earnings must be equal to or more than the employees ‘basic pay’ as defined in the regulations.

Set 2

Total contributions of at least 8% of the employees pensionable earnings (including an employer contribution of at least 3%) for each relevant employee in the scheme, provided that the total pensionable earnings of all relevant employees to whom this set applies constitutes at least 85% of their total earnings*.

The pensionable pay must be equal to or more than that employees basic salary.

Set 3

Total contributions of at least 7% of the employees earnings (including an employer contribution of at least 3%) for each relevant employee in the scheme.

All earnings must be pensionable.

* The Department for Work and Pensions (DWP) have produced guidance for employers on certification. Page 13 of this guidance document covers how to calculate it.

If you want to change the method for calculating the minimum contributions you use for your qualifying scheme there are some practical things to be aware of:

  • If you’ve certified your scheme already, you’ll need to alter the expiry date of your current certificate to the day after the new one takes effect. Please remember it’s not possible to retrospectively cancel a certificate.
  • Complete a new certificate for the set you want to certify under within 1 month of the effective date of the certificate (the date you want to change sets).
  • Use the new method for calculating the minimum contributions. So if you’re changing from set 1 to set 3, the new calculation will be 7% of the employees total earnings instead of 9% of the employees pensionable earnings.
  • If you’re moving to set 2 you’ll also have to ensure that the total pensionable earnings for the employees you’re including on the certificate constitutes at least 85% of their total earnings.

Here are two examples that show how the cost of minimum contributions could change, if you move between:

  • set 1 and set 3, and
  • set 2 and set 3.

Moving from set 1 to set 3

An employee with pensionable earnings of £25,000 is entitled to total contributions of 9% of pensionable earnings under set 1 (made up of an employer contribution of 4% and an employee contribution of 5% gross of pensionable earnings).

If the employer wants to change the basis used from set 1 to set 3, the employee’s total earnings would need to be £32,143 for the total gross pension contribution to remain at the same level following the change.

  6 April 2019 to 5 April 2020
Set 1 Set 1 Set 3 Set 3
Pensionable earnings £25,000 Total earnings £32,143
5% employee £1,250 4% employee £1,285.72
4% employer £1,000 3% employer £964.29
Total £2,250   £2,250.01

If total earnings are more or less than £32,143 then this would result in a corresponding increase or reduction in the total contribution following a change from set 1 to set 3.

In this example moving from set 1 to set 3, while keeping the overall contribution the same, results in a slightly increased employee contribution and a slightly decreased employer contribution.

Using a different certification set with a lower minimum % contribution rate doesn’t necessarily mean that both the employer and employee elements of the minimum contribution will reduce.

Moving from set 2 to set 3

In this scenario the same employee is entitled to total contributions of 8% of pensionable earnings under set 2 (made up of an employer contribution of 3% and an employee contribution of 5% gross of pensionable earnings).

If the employer wants to change the basis used from set 2 to set 3, total earnings would need to be £28,572 for the total gross pension contribution to remain at the same level following the change.

  6 April 2019 to 5 April 2020
Set 2 Set 2 Set 3 Set 3
Pensionable earnings £25,000 Total earnings £28,572
5% employee £1,250 4% employee £1,142.88
4% employer £750 3% employer £857.16
Total £2,000   £2,000.04

If total earnings are more or less than £28,572 then this would result in a corresponding increase or reduction in the total contribution following a change from set 2 to set 3.

In this example moving from set 2 to set 3, while keeping the overall contribution the same, results in a slightly decreased employee contribution and a slightly increased employer contribution.

Using a different certification set with a lower minimum % contribution rate doesn’t necessarily mean that both the employer and employee elements of the minimum contribution will reduce.

Summary

Care needs to be taken when changing between certification sets to assess the effect it could have on pension contributions for you and each individual employee.

Making a change like this requires some administrative work, along with a change to the way you calculate the minimum contribution that should be paid. You may need to consult on this change, so we’d recommend you get legal advice before making any changes.  

The information in this article is based on our understanding of current, taxation law and HMRC practice, which may change.