Workplace pensions explained – how much does your employer contribute?

Martin Lewis explains benefits of workplace pension

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A workplace pension is a way people can save for retirement, arranged and implemented by their employer. It works by automatically placing a percentage of a worker’s pay into the pension scheme each time they get paid.

The employer then usually adds money into the pension scheme for their employee as well. The employee may also get tax relief from the Government on their contributions.

All UK employers are required to provide a workplace pension scheme and operate what is called ‘automatic enrolment’.

This means the employer must automatically enrol their staff into a pension scheme and make contributions if they meet certain criteria.

An employee is eligible for auto enrolment if they:

  • Are classed as a ‘worker’
  • Are aged between 22 and state pension age, currently 66
  • Earn a minimum of £10,000 per year
  • Ordinarily work in the UK

How much is paid?

The amount of money an employee and employer put into a pension scheme depends on:

  • What type of workplace pension scheme the employee is in
  • Whether they have been automatically enrolled in a workplace pension or have joined opted in

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Auto enrolment rules

When someone has been automatically enrolled, they and their employer must pay a percentage of their earnings into the workplace pension scheme.

In most auto enrolment schemes, an employee makes contributions based on their total earnings between £6,240 and £50,270 a year before tax.

People should be aware that not only their base salary or wage is included as ‘earnings’.

Bonuses and commission, overtime, statutory sick pay, statutory maternity, paternity and adoption pay are all included in earnings.

Employees must pay a minimum of five percent of their earnings, while their employer must contribute at least three percent, bringing the total minimum contribution to eight percent.

However, it is often possible for workers to contribute more, and get more help from their employer in boosting their pension.

Voluntary enrolment rules

An employer must contribute the minimum amount of three percent, providing the employee earns more than £520 a month, £120 a week or £480 over four weeks.

Otherwise, the employer does not have an obligation to contribute anything.

Tax relief

The Government usually adds money to people’s workplace pensions by providing tax relief to the employee, if the following conditions are met:

  • The employee pays Income Tax
  • They pay into a personal pension or workplace pension

Those who do not pay Income Tax will still get relief if their pension scheme uses ‘relief at source’.

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