When it comes to dealing with retirement, we need to have saved enough to see us through retired life. However, paying for a pension right now can be an expensive investment for most of us. From April 2019, we’re expecting to see a significant 1.6% increase in auto-enrolled pension schemes across the United Kingdom. Millions of people auto-enrolled into pensions will now be paying as much as 4% of their pay into the scheme, up from 2.4% at present.
WHAT ARE PENSION DEDUCTIONS?
For many people, auto-enrolled workplace pensions are commonplace in their employment contracts. This means that both you and your employer will pay a percentage of your earnings into the workplace pension scheme. The amount that you pay will depend on the amount that your employer has chosen, with many choosing to move to the 4% margin.
Most auto-enrolment schemes will allow you to make contributions based on your total earnings between £5,876-£45,000 per year before tax. Total earnings would include salary, bonuses, overtime, sick pay and also maternity and paternity pay, according to HMRC.
WHY ARE PENSION DEDUCTIONS PUT IN PLACE?
These deductions exist because they are set by the Government. It’s important that everyone has access to a pension pot later in life. With the opportunity to invest nothing in it now, it could make later life more challenging than it needs to be. With a minimum pension deduction, employers and employees will be responsible for contributing to their safe well-being in the future.
These are also set (within the limits given by the Government) by your employer. This means that, while you work for your employer, you would need to pay the minimum amount towards your pension. Your employer must pay some of the minimum total contribution. If your employer doesn’t pay all of the minimum total contribution, then you will need to pay some of the difference.
WHY DO PENSION DEDUCTIONS CHANGE?
Pension deduction increases take place based on Government legislation and several political, social and economic factors. The Government sets minimum levels of contributions that must be paid to the workplace pension scheme by you and/or your employer. The minimum total contributions have been set for automatic enrolment by the Government. These contributions to the pension scheme are usually based on your qualifying earnings. These are your earnings from employment, prior to Income Tax and National Insurance Contributions. The Government will then set what the fall is between the upper and lower earnings limits. If your employer decides to pay only the minimum amount, the minimum total contribution would be a percentage of your qualifying earnings.
This means that if you were to be paying 4% of your total contribution, then your employer could be paying in as much as 3% of your qualifying earnings from 6 April 2019. In return, the Government would add tax relief of 1% from 6 April 2019, meaning you could see as much as 8% of your earnings going into your pension pot.
That being said, your employer may choose to base contributions on your pensionable pay. This is different to qualifying earnings, and is likely to be applicable to you if your employer offered a workplace pension scheme prior to automatic enrolment. Normally, you will find that pensionable pay is your basic salary, not including elements such as commission, bonuses or overtime. If your employer chooses to use pensionable pay instead of qualifying earnings, they’ll need to satisfy one of three qualifying bands. This would ensure that you qualify for use under automatic enrolment, and in order to calculate the minimum total contributions which would be payable.
HOW SHOULD I DEAL WITH PENSION DEDUCTION INCREASES?
For one, you will typically get money added into your workplace pension by the Government. This comes in the form of tax relief if you are presently paying Income Tax, and you also pay into a personal pension or a workplace pension. However, if your pension scheme is using ‘relief at source’ then you can still have money added to your pension pot – even if you are not paying Income Tax. While pension deduction increases can seem like a big extra investment, it’s important to plan for the future.
You should take a look at your employer contributions using the employer contribution calculator. As an employee you should always look to understand what kind of scheme you are involved with. You can check this with your pension provider or employer who should be able to give you further details. You can also check your payslip to see how much you have been taxed. What you see on your payslip will depend on the kind of arrangement your workplace pension uses. This could be a ‘net pay’ or ‘relief at source’ arrangement.
If you’re on a ‘net pay’ arrangement, then your employer will take your contributions from your pay before it’s taxed – you only pay tax on what is left. This would mean that you get benefit from full tax relief, whether you pay the basic, higher or additional rate. The amount you’ll see on your payslip will be your contribution plus the tax relief.
Alternatively, with ‘relief at source’ your employer will take your contributions after taking tax and National Insurance from your pay. This means that on your payslip you will only see your contributions, not the tax relief.
BENEFITING FROM A PENSION DEDUCTIONS INCREASE
First off, you could always choose to opt out of a pensions scheme. The idea of auto-enrolment, the pensions contribution scheme of choice for millions of UK workers, has been a success. However, there are various tax advantages – outside of just the tax relief provided by the UK Government by default – to having a pension.
Sometimes, paying a little more into your pension can reap rewards in the immediate and far-off future. If you would like to find out more about the potential tax benefits and rewards that you could tap into, you can speak to our team at Devonshire Green.
We can evaluate your personal issues and work out how you could make the most of paying more into your pension. Through better investment opportunities through tax savings, there are many benefits to having a pension. If you would like advice on using your pension properly, and benefiting from its every advantage, contact us today.