Pensions - what you must do, and what you might want to do...
Since autoenrolment, pretty much everyone has to have a personal pension, or have consciously opted out. Here we explain how the required contributions change over time, and what more you can opt to add.
What's the legal requirement?
Under the Pensions Act 2008, every employer in the UK must put certain staff into a pension scheme and contribute towards it. This is called 'automatic enrolment'. If you employ at least one person you are an employer and you have certain legal duties. By now pretty much everyone has passed their "staging date" and therefore has to have aq pension plan for their employees. The only exception is if everyone wants to opt out - but even then the pension scheme has to be set up and then people have to be enrolled before "opting out".
Once the scheme is up and running, contributions have to be made by both the employer and the employee.
How much do we both need to put in?
The auto enrolment minimum is initially 2% of which at least 1% must be paid by the employer. In April 2018, this increases to 5% of qualifying earnings of which at least 2% must be paid by the employer. In April 2019 this rises again to of 8% qualifying earnings of which at least 3% must be paid by the employer.
These contributions are set on earnings over £113 per week up to an upper limit of £866 per week. You have the flexibility to pay contributions at a rate that suits your business objectives, subject to these being at least equal to the minimum requirements below.
|Date||Employer minimum contribution||Employee minimum contribution||Total minimum contribution|
|Before April 5 2018||1%||1%||2%|
|April 6 2018 – April 5 2019||2%||3%||5%|
|April 6 2019 onwards||3%||5%||8%|
Can I or my company contribute more?
You should check the latest HMRC guidance on tax and pension contributions here. At the moment, HMRC say you will usually pay tax if savings in your pension pots go above:
- 100% of your earnings in a year - this is the limit on tax relief you get
- £40,000 a year - check your ‘annual allowance’
- £1 million in your lifetime - this is the lifetime allowance
You also pay tax on contributions if your pension provider:
- isn’t registered for tax relief with HM Revenue and Customs (HMRC)
- doesn’t invest your pension pot according to HMRC’s rules
If your pension scheme has been set up and is administered by Whitehill, these last two conditions don't apply.
In addition, the business can pay into the pension by the financial year end. In principle, if the business pays in to your pension plan, the pension contributions can be treated as an allowable business expense and offset against your company’s corporation tax bill. Another benefit is that employers don’t have to pay National Insurance on pension contributions.
However - your contributions must abide by the rules for allowable deductions. The rules state that the pension contributions should be ‘wholly and exclusively’ for the purposes of business. The HMRC rule is “for employed individuals, the maximum your employer can contribute is technically not restricted, but employer contributions will only be deductible as an expense against profits provided that they are incurred “wholly and exclusively for the purposes of the employer’s trade or profession”. To figure out whether this is the case, HMRC look for certain evidence, for example whether other employees are receiving comparable remuneration packages.
In addition, it's important that the amounts paid by the company into your pension are not larger than your corporate income for the year of the contribution, otherwise there might be questions from HMRC about whether the money was actually sourced from your trading activities,
If you need a pension setting up or administering, get in touch. We're not pensions advisers, though, so we can't offer advice on investments for retirement. For that, you'll need a free consultation with a government adviser, or an authorised independent financial adviser.