Auto Enrolment Pension Contribution Basis – Self Certification

It is now 12 years since the government introduced the Pensions Act 2008 which led to the most significant change to workplace pensions for a decade, “Auto Enrolment”. I expect you assume like most employers that auto enrolment is finished and adding staff to the pension is another monthly task and its back to business as usual. Unfortunately, like most things in life, it’s not that simple.

Cast your mind back to your staging date which if you like me you can’t remember what you did last week, this might be difficult as most employers staged at least 3 or more years ago.

I bet you didn’t know it is a legislative requirement to have a valid Auto Enrolment Scheme Certificate in place for the qualifying pension scheme that the company contributes to, where contributions are certified on an alternative basis to Qualifying Earnings. The maximum period a certificate can be valid for is 18 months. So if you haven’t updated your certificate since you’re staging date it is likely the original certificate will have expired.

Some employers may have an up to date certificate but when asked whether they have tested that their contributions comply with their chosen contribution basis, they don’t know what we are talking about. In particularly this applies to the Tier 2 and the Tier 3 bases.

Can you remember what contribution basis you choose? If you outsourced this process to your accountant, payroll provider or financial adviser you may have no idea. Just to summarise there are 4 contribution basis (see below) you could use and you can have different basis applying to different staff within your payroll.

Qualifying Earnings

These are all P60 earnings between stated Lower and Upper thresholds, which are reviewed annually; any earnings outside of these amounts are ignored for contribution purposes. The current Lower and Upper Thresholds and statutory minimum contribution rates from 6th April 2019 are shown in the tables below:

  2019/2020
Lower Limit £6,136 (£512)
Upper Limit £50,000 (£4,167)

 

Employee Contribution Employer Contribution Total Contribution
5% 3% 8%

Basic Pay Tier 1
Contributions are based on pensionable pay provided it constitutes basic pay.

Employee Contribution Employer Contribution Total Contribution
5% 4% 9%

Basic Pay – Tier 2
Contributions are based on pensionable pay provided it constitutes basic pay and this is at least 85% of total earnings the ratio of which can be calculated at scheme level.

Employee Contribution Employer Contribution Total Contribution
5% 3% 8%

Total Pay – Tier 3 basis.
All elements of pay are considered pensionable under this basis e.g. P60 earnings.

Employee Contribution Employer Contribution Total Contribution
4% 3% 7%

Tier 3 requires you make sure that every element of pay (P60 earnings) has been subject to pension contributions. For example, overtime which may happen occasionally for some staff, did the payroll system subject the overtime to pension contributions or not?

For Tier 2, does basic salary to which the contribution rates apply constitute 85% of P60 earnings at a pension scheme level? We have recently come across a number of employers who have met this criteria in previous years but not in the current year due to commission and bonus payments which have become payable from long term incentive schemes.

Unfortunately as you can see the self-certification process and Auto Enrolment process needs to be revisited on a regular basis to insure compliance. It’s a bit like the “bad penny” that keeps showing up. Obviously you could cross your fingers and toes and hope you are complying but that is a high risk strategy because if you are found to be making incorrect contributions even if this is due to a lack of knowledge, you would need to make good any shortfall on behalf of employees which could be a costly exercise.

Why is this so important? Well The Pension Regulator (TPR) has taken enforcement action against over 4,000 employers who have failed to carry out their re-enrolment duties in this year alone, resulting in over 800 penalty notices and fines being issued for continued non-compliance.

Therefore if you want to sleep soundly at night we would recommend you engage with a specialist to carry out an assessment of your compliance with Auto Enrolment legislation with the view to putting in place a clear pension governance strategy in case of a spot check from the regulator.

At Wingate we offer a free pension review service which would highlight any compliance issues and how to resolve them. This could avoid an unexpected fine, backdated contributions and the additional administration involved in remedying any errors. Please contact Wingate if you would like to see how we can assist you with your ongoing pension governance and review your existing processes’ free of charge.

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