Pensions: Banded earnings and savings for employers

Ensure correct pay is used to calculate pension

We recently took a new restaurant client and were reviewing their employee pension arrangements under auto enrollment.

We noticed that the client (employer) was contributing pension on full pay rather than qualifying earnings.

Qualifying earnings  – These are your earnings from employment, before income tax and National Insurance contributions are deducted, that fall between a lower and upper earnings limit that are set by the Government.

Example: CD Ltd has an employee Jane and her monthly salary is £1,500.

Pension on full pay Pension on qualifying earnings
Monthly salary

£1,500

Monthly salary

£1,500

Threshold – full pay

£0

Threshold – lower band

£503

Pensionable pay

£1,500

Pensionable pay

£997

Employer contribution @ 2%

£30

Employer contribution @ 2%

£20

Additional employer’s contribution under full pay method is of £10.

This employer has c30 employees. Thus yearly savings are of c£3,500.

This employer also has couple of employees over upper limit, thus additional savings.

Restaurant trade inherently has a high staff turnover and it’s advisable to postpone staff pension deductions for three months to avoid deducting pension for staff members who work for a short time with the employer. We also implemented at this client which will result in additional savings.

Caution: Please ensure employees are communicated about these changes.

 

 

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