Join us as we explain what a workplace pension is and how it works. We’ll also provide you with examples to help you understand exactly how much you should be paying as either the employee, or the employer.
A workplace pension is a scheme that helps employees to save for their retirement by taking a small percentage of the employee’s wage, whether they get paid daily, weekly or monthly. A workplace pension also benefits from contributions the employer and the government make in the form of tax relief.
Most employers must offer workplace pensions and should automatically enrol staff if they meet the eligibility requirements below:
However, employees can choose to opt out of a workplace pension scheme if they wish, but that would mean that they can’t benefit from the employer’s contribution or government tax relief.
With most workplace pension schemes, the employee will make contributions based on their total earnings between £5,876 and £45,000 a year before tax. The employee’s total earnings include the following:
The employee will contribute a minimum of 3% of their wage, which is taken out in small contributions each time the employee is paid. The employer will then contribute 2% making the total contribution 5% of the employee’s total earnings between £5,876 and £45,000.
However, from the 6th April 2019 onwards, employees will be required to pay a minimum of 5% each month with an employer contribution of 3%, making the total pension investment 8%.
With most schemes, the employee has the option to pay more into their workplace pension, but the employer isn’t required to pay in above the minimum percentage if the employee does choose to increase their contribution.
Now that we know how much the employer and employee should be paying, let’s have a look at it in practice:
If an employee’s total earnings are £20,000 per year, they would contribute 3% of £14,124 (as only the amount earned between £5,876 and £45,000 is considered) to their pension.
Therefore, if the employee is paid monthly, they would be contributing £35.31 each month (3% of £14,124 divided by 12). The employer would contribute £23.54 each month (2% of £14,124 divided by 12), making the total monthly contribution £58.80, and the total yearly contribution £706.20 (5% of £14,124).
Here’s another example, but this time with the higher contributions that are coming into effect from April 2019:
This time, let’s say the employee earns £10,050 a year before tax. Their contribution would be 5% of £4,174 (as only the amount earned between £5,876 and £45,000 is considered).
So, if the employee is paid weekly, they would be contributing £4.01 each week (5% of £4,174 divided by 52). The employer would contribute £2.41 each week (3% of £4,174 divided by 52), making the total weekly contribution £6.42, and the total yearly contribution £333.84 (8% of £4,174).
You can also use a workplace pension contribution calculator to gain an estimate of how much you and your employer will be paying.
Although the above applies to most workplace pension schemes, if you’re an employee and you’re unsure of how much you pay, it’s always worth asking your employer about your specific pension scheme rules. How much you pay and what counts as earnings can vary depending on the pension scheme your employer has chosen.
If you’re an employer, you can find out about the various workplace pension providers and schemes available on the Pensions Regulator website. You can find out how to choose the right pension scheme here. Alternatively you can discuss your options with your accountant to ensure you and your staff members are enrolled into a scheme that suits your business best.
At Esme, we offer business loans ranging from £10,000 to £150,000* over a 1 to 5 year repayment period. A business loan can offer you a quick injection of capital that can help your business expand in exciting directions without having to worry about major hits to your cash flow.
Think you’re ready to make the next move? Just fill out our 10 minute application form or try our business loan calculator to get an idea of how much your monthly repayments could be.
*From £25,500 for Sole Traders