What are Workplace Pension Contributions?
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
Workplace pension contributions are small percentages of money put aside by you, your employer and the government to help you build a pot of money to live off in retirement.
By law all employers must automatically enrol their employees in a workplace pension scheme if:
- they’re employed within the UK
- they earn over £10,000 per year, and
- they’re aged between 22 and State Pension age.
If you don’t fit these criteria, you may still be able to join the Pension scheme by opting in through your employer.
What are the current contribution rates?
Once enrolled in a workplace pension, you decide what percentage of your salary to contribute.
Currently, the minimum you must contribute is 3% of earnings between £6,032 and £46,350, with your employer contributing 2%, bringing the total minimum contribution to 5%. The government adds 0.6% tax relief on your contribution, meaning your contribution rate actually works out as 2.4%, 2% from your employer and 0.6% from the government, bringing the total minimum contribution to 5%.
For example, if you earned the UK’s average salary of £27,000, you would see a contribution of £41.94 come from your monthly salary, your employer would contribute £34.95 and you would receive £10.48 in tax relief, bringing the total monthly contributions to £87.37.
What are the new contribution rates?
From the 6th of April this year, contribution rates are set to change.
Your minimum contribution will be 4% of earnings between £6,136 and £50,000, with your employer contributing 3% and the government contributing 1% in tax relief.
Your minimum contribution will be 5% of earnings between £6,136 and £50,000, with your employer contributing 3%, bringing the total minimum contribution to 8%. The government will add 1% tax relief on your contribution, meaning your contribution rate actually work out as 4%, 3% from your employer and 1% from the government, bringing the total minimum contribution to 8%.
For example, if you earned the UK’s average salary of £27,000, you would see a contribution of £69.90 come from your monthly salary, your employer would contribute £52.42 and you would receive £17.47 in tax relief, taking the total monthly contributions to £139.79.
In this example, your contribution rises by just £28 but the overall amount of going in to your pension rises by over £50. An extra £50 a month invested could make a significant difference to your quality of life in retirement.
What do you want your retirement fund to look like?
It’s worth remembering that these contribution rates are minimums. If you want to reach your retirement goal sooner or have a higher income after work, you can increase the amount you contribute.
Auto Enrolment Pensions schemes are designed to help more individuals reach their savings goals and secure a comfortable retirement. By increasing your monthly contributions, you could build a fund for later life sooner than you’d imagined.
You can learn more about auto-enrolment pensions and saving for retirement by subscribing to our YouTube channel or visiting tpinvestor.com.