What is a workplace pension?
A workplace pension allows you to save for and contribute to your pension by paying a percentage of your pay into the scheme automatically. Your employer will then also add money into the scheme.
The basic criteria is that if you are over 22 years old and earn at least £10,000 per year, your employer must automatically enroll you into a pension scheme and make contributions. There are other criteria.
The government will also add money to your workplace pension, in the form of tax relief. This is provided you pay Income Tax.
How does it work?
From April 2019, the minimum contributions to workplace pensions are, for employers, 3% and for the individual, 5%. Normally the 3% employers’ contribution is seen as a free “bonus” payment into the employee’s pension. This is because it is paid by the employer above the gross salary level agreed with the employee.
Most employers operate a 3 month period at the start of employment where the employee is not “opted in”. The opt in starts automatically after the end of the 3rd month.
You always have the right to opt out of a workplace pension scheme. Even if you have been automatically enrolled, if you opt out within the first month, it will be as if you never joined and you will be refunded any money that you have contributed.
Contractors moving to PAYE
If you are moving to PAYE from a Limited Company, you are also within your rights to opt out of a workplace pension scheme.
For contractors, the top line available to secure their services is defined (e.g. the old company day rate) and the 3% employers’ contribution comes out of this. If a contractor was to then choose not to opt out, the contractor won’t contribute for the first three months. Therefore, the gross salary for those three months should be increased as the employers’ contribution is not being spent.
If the contractor chooses to opt out from the beginning then, again, gross salary should be increased from day one.
We have created a day rate calculator for contractors to input the day rate that the agency charges them back to the end client. It will then produce the day rate that they should receive from the agency.
As always, we are very happy to answer any questions about workplace pensions. Please feel free to contact us.