Employers set up Workplace Pension Schemes for employees.  An employer pays a minimum amount into the scheme for each qualifying employee. The total amount paid in is 8%. This comprises 3% by the employer 4% by the employee and 1% from the government as tax relief. The government and employer pay 166% of that paid by employees. This is a great way of saving for the future!

The contribution is based on the qualifying earnings of the employee. The limits of Qualifying Earnings are between a lower limit of £6,240 to £50,000 for the upper earnings limit (2020/21). Contributions do not need to be paid below the Lower Earnings limit. The limits are gross pay before tax and National Insurance.

Boosting payments in

Salary Exchange (Salary Sacrifice) is a way to pay scheme payments. Employees give up part of their salary or additional income such as a bonus. The employer then makes a pension payment in exchange.

The tax and National Insurance savings make this cost effective for the employee and employer. Employers may use the National Insurance saving however they wish. Some may use all or a proportion of it to increase the pension contribution for the employee. Employees can take the tax savings to boost take home pay or they may also increase the pension contribution. This is a win-win for employees and employers, just for a small amount of effort completing a little paperwork.

Higher rate or additional rate taxpayers benefit as they get the payment gross to the scheme and do not have to claim the tax relief through their self-assessment.  An even bigger win for high earners. They saving tax early in the process and do not need to remember to claim the tax relief in a self-assessment.

Some earners should take care with salary exchange. Mortgage providers may base their figures on post salary exchange multiples, state pension entitlement may be affected for lower income employees and statutory maternity/paternity pay statutory, sick pay and other government benefits may be affected.

Generous employers

Some employers may agree to pay more into an employees pension to build pension pots faster. This is known as contribution matching. Employers will increase the amount paid into the scheme, where the employee does the same. Most employers will have a limit to the amount they will pay into the scheme.

For example if an employer contributes 5% with the employee contributing 3% and an agreement is in place that the employer will pay to a maximum matching contribution of 8%,  then if the employee increases their contribution to 8% then the employer will pay an additional 5% to the pension scheme. This would mean the employer contributing a total of 10% and the employee paying 8%.