Workplace pensions and Auto Enrolment - who pays and how much?

The whole point of workplace pensions and Automatic Enrolment is to provide employees with the opportunity to build up savings to provide an income in retirement. Under auto enrolment both employers and their employees will be compelled to contribute to the employee’s plan.

The minimum levels of contributions will be increased gradually over the first few years of membership and details of this are provided below, but it is important to define what earnings are included in the employee’s qualifying earnings before calculating what must be contributed to their pension plan.

Qualifying Earnings

Qualifying earnings are the proportion of an employee’s gross earnings that fall between £5,668 and £41,450 (2013/14 tax year). These minimum and maximum figures are the same as the thresholds for Class 1 National Insurance. There is no guarantee that these amounts will continue to mirror Class 1 National Insurance, although it is expected that they will increase each year.

Earnings include:

  • Salary
  • Wages
  • Overtime
  • Bonuses
  • Commissions
  • Statutory pay for sickness, maternity, adoption and paternity leave

While this appears straight forward, employers will have to be aware of the eligibility for inclusion in the definition of salary of allowances they may commonly pay to employees. For example, the treatment of car allowances paid to employees will be different if it is paid as a contractual commitment due to the grade or status of the employee (included), rather than as a business expense for mileage driven as part of an employee’s role (not included).

Contribution amounts

The target minimum contribution in a new workplace pension under the new regulations will eventually be 8%, of which at least 3% must be paid by the employer.

We have used the phrase ‘target minimum’ because the new regulations recognised that imposing a burden of this magnitude on business overnight could mean significant hardship for the employer and employee. Contributions can be phased in from the employer’s staging date – the commencement date of the new pension plan - as follows:



Minimum Employer Contribution

Minimum Total Contribution

Staging date – September 2017



October 2017 – September 2018



October 2018 onwards




Phasing in the new contributions is not compulsory, but can provide an opportunity for employers and employees to prepare for what will be a significant extra expense. It is worth noting that employee contributions, which from October 2018 could be 5%, are gross of tax relief. This means that under current legislation, the employee will pay a minimum of 4% of qualifying earnings and the government will contribute 1% in tax relief.

Employers and employees may contribute more to the workplace pension if they wish, subject to maximum contributions. Additionally, employers may use different definitions of earnings for the purposes of calculating both their own and the employee’s contributions. Employers have quite wide discretion when setting up their scheme, as long as the methods, rules and definitions used result in no less than the minimum contributions referred to above being paid.


All payments must be paid by the employer to ensure that the plan being used by the employer qualifies as a Workplace Pension.




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