Phased increase in contributions for auto-enrolment and qualifying schemes

These FAQs are for financial advisers only. They must not be distributed to, or relied on by, customers. They are based on our understanding of current legislation, at the date of publication.

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Overview

To be a ‘qualifying scheme’ in relation to a jobholder, the scheme must meet the quality requirement. For a money purchase scheme (including personal pension schemes) part of the quality requirement is that the scheme rules (or in the case of a personal pension scheme, the agreement(s) with the provider and, where relevant, the jobholder) require contributions to be paid at a prescribed minimum level. 

To help employers (and, where relevant, jobholders) adapt to the new provisions when they were first introduced, the government decided to phase increases to the minimum contribution level over a period of time. The original timescale for the phased increases was for the first increase to take place from 1 October 2017 and the second from 1 October 2018. This was delayed slightly, so that the first phased increase took place on 6 April 2018, with the second following a year later, on 6 April 2019.

This table shows how contributions have been phased in from the start of automatic enrolment and the forthcoming increase in April 2019, for qualifying earnings and each of the three certification sets.

How contributions are due to increase in April 2018 and 2019
Earnings set Earnings definition Minimum contribution to 5 April 2018 Minimum contribution 6 April 2018 to 5 April 2019 Minimum contribution 6 April 2019 onwards
Qualifying earnings Based on all earnings, deducting the lower earnings threshold and capped at the upper earnings threshold 2% at least 1% of which must be the employer’s contribution 5% at least 2% of which must be the employer’s contribution 8% at least 3% of which must be the employer’s contribution
Set 1 Based on pensionable earnings which must be at least equal to the employee’s basic pay 3% at least 2% of which must be the employer’s contribution 6% at least 3% of which must be the employer’s contribution 9% at least 4% of which must be the employer’s contribution
Set 2 Based on pensionable earnings which must be at least equal to the employee’s basic pay. This set can only be used if the combined total pensionable earnings of all employees in the group is at least 85% of their combined total earnings 2% at least 1% of which must be the employer’s contribution 5% at least 2% of which must be the employer’s contribution 8% at least 3% of which must be the employer’s contribution
Set 3 Based on all earnings 2% at least 1% of which must be the employer’s contribution 5% at least 2% of which must be the employer’s contribution 7% at least 3% of which must be the employer’s contribution

Remember, if an employer pays more than the minimum employer contribution, jobholders only need to make up the difference between what the employer is paying and the total minimum contribution. For example, an employer using qualifying earnings as the basis for calculating contributions pays 5% - when the next phased increase takes effect, the total minimum contribution is set at 8% - this means the jobholder only has to pay 3% (i.e. the difference between what their employer pays and the total minimum contribution rate).

If an employer is paying the full amount of the total minimum contribution, or more, there is no requirement for the jobholder to pay anything.

Employers and jobholders can pay more than the minimum amount if they want.

Jobholders have to pay the shortfall between what their employer pays and the total minimum contribution, in order for the scheme to remain qualifying for them.

If they don’t want to pay this amount, they can ask their employer to allow them to remain in the scheme but pay a lower contribution. If the employer agrees, the scheme will cease to be a qualifying scheme in relation to that jobholder. There are a few things to note, if a jobholder decides to go down this route:

  • If the scheme is no longer qualifying in relation to a jobholder, the employer is not required by the Pensions Act 2008 to pay the minimum contribution – in fact, they don’t have to pay anything at all – but they can if they want to.
  • The phased increases above only apply to active members of a qualifying or automatic enrolment scheme, so they don’t affect those where the total minimum contribution isn’t being paid.
  • The employer may have to re-enrol such jobholders at their next cyclical re-enrolment date, if they meet the criteria.

The minimum contribution rate is due to increase again on 6 April 2019. An employer’s PRP may not start on this date, so they’ll need to agree with their payroll provider about how best to calculate the minimum contribution due for the affected PRP.

For example, an employer uses a monthly PRP which runs from first day of the month, until the end of that calendar month. The April PRP therefore runs from 1 April – 30 April. The minimum contribution rate changes on 6 April 2019, so how is the minimum contribution for that PRP to be calculated?

The Pensions Regulator has given some guidance here(Opens new window) (see the section called ‘Ensuring the correct contributions are deducted’). They have suggested that a pro-rata calculation* of the minimum contribution may be required where the PRP spans 6 April 2019, but go on to say that if an employer’s payroll provider doesn’t do pro-rata calculations, the employer should agree an alternative approach with them, such as paying the increased rate for the whole of the PRP rather than just from 6 April.

* The pro-rata calculation for this example would involve using the current minimum contribution rates for the part of the PRP from 1 – 5 April, then using the new, higher rates for the remainder of the PRP, i.e. 6 – 30 April.

Pensions Technical Services