Quilter

Jamie Clark

In today’s world, where we’re living longer and facing an aging population, pensions have become a crucial part of our financial planning. Employers play a significant role in helping employees save for retirement through auto-enrolment contributions. They play an important role in educating their employees on the ins and outs of employee-employer pension contributions, potential pitfalls, and how they can be used as a tax-efficient strategy.

Employers in the UK have a legal obligation to provide auto-enrolment contributions for their employees as part of the government’s initiative to encourage retirement savings. Under this scheme, eligible workers are automatically enrolled in a qualifying workplace pension, and both the employee and the employer contribute to it. From April 6, 2019, the minimum autoenrolment contribution for employers is set at 3% of an employee’s qualifying earnings, whereas the total minimum contribution, including the employee’s share, stands at 8%. Employers must stay up-to-date with the current contribution rates and ensure they fulfil their legal obligations to help their employees save for retirement.

In reality, 8% of qualifying earnings is still low, and while there isn’t a specific limit, providing higher contributions can be favourable. However, to avoid tax charges, contributions should not exceed the total annual allowance in a tax year, which covers all employee and employer contributions, as well as the increase in benefits in Defined Benefit (DB) schemes (called the pension input amount or PIA). The standard annual allowance for the current tax year is £60,000. This limit can be lowered if the tapered annual allowance or money purchase annual allowance (MPAA) applies. Note that if the annual allowance is exceeded, it’ll result in a tax charge to the employee at their marginal tax rate. Contributions of more than the annual allowance can be made if the PIAs from the previous three tax years haven’t been fully used up. This ‘carry forward’ facility can be very useful in increasing contributions for key employees, but it can be complex – financial advisers and accountants can help here.

“Employers in the UK have a legal obligation to provide auto-enrolment contributions for their employees as part of the government’s initiative to encourage retirement savings. Under this scheme, eligible workers are automatically enrolled in a qualifying workplace pension, and both the employee and the employer contribute to it”

Employer pension contributions can normally be offset against corporation tax. It’s a good idea to chat with an accountant to ensure any contributions can be offset as a business expense, according to the ‘wholly and exclusively’ rules.

There’s another way employers can make pension contributions even more valuable – through a salary sacrifice or salary exchange scheme. In this arrangement, employees give up part of their salary in return for an employer pension contribution. The advantage is that it can save on employer and employee National Insurance Contributions. These savings can be added to the employer’s contributions, further boosting employee pension savings. Many auto-enrolment schemes in the UK operate on this basis as it is a valuable part of the ‘attract and retain’ toolkit. However, these arrangements might affect the employee’s take-home pay, borrowing power, and student loan repayments, among other things. Also, arrangements like this constitute a change to the employee’s employment contract, so it’s always best to ensure they are worded and implemented appropriately. For example, you may want to restrict agreements below a certain salary level to avoid violating the national minimum/living wage requirements.

Employers play a vital role in helping their employees save for retirement. By understanding the complexities of pension contributions and avoiding potential pitfalls, they can contribute effectively and reduce their corporation tax bill while providing their employees a significant and valuable boost to their pension pots. As the pension landscape changes, staying informed and adapting to the evolving rules will be essential for employers and employees to secure a comfortable retirement.