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July 3, 2024

UK Workplace Pension Contributions: Employer & Employee Guide

Get insights into UK workplace pension contributions. Understand the minimum contributions for employees and employers and the benefits of higher contributions.

Aine Kavanagh

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Aine Kavanagh

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How much should you contribute to a workplace pension plan in the UK?

The minimum pension contributions for an employee’s pension pot are:

  • Employer contribution: At least 3% of the employee’s qualifying earnings.

  • Employee contribution: At least 5% of your qualifying earnings.

Keep reading to learn about qualifying earnings and how contributions work (with examples). We’ll also highlight the easiest way to manage UK workplace pension schemes.  

Further Reading

Employer vs. Employee Pension Contributions: Who Pays What in The UK?

The amount you can contribute depends on the employee’s pensionable earnings, which in turn depend on their qualifying earnings.

Pensionable earnings are the portion of an employee’s earnings that determine both parties’ pension contributions. What is used to calculate your pensionable earnings for your automatic enrolment is an employee’s salary, wages, overtime, bonuses, and statutory pay. This is known as qualifying earnings and for 2024/2025 this has been set at £6,240 to £50,270, which means income below £6,240 and above £50,270 are not used in the calculation.

Learn all about Pensionable Earnings and how they are tied to qualifying earnings in the UK. (Psst… this comes in handy in the next sections).

What’s the Minimum Pension Contribution for Employees?

  • Minimum Contribution: For employees, the contribution rate is at least 5% of their pensionable earnings.

  • Tax Relief: Employees' contributions are made before tax is deducted, so you get pension tax relief automatically. For example: 

    • Your annual salary = £30,000

    • Qualifying earnings band = £6,240 - £50,270

    • You contribute 5% of your qualifying earnings = 0.05 x (30,000 - 6,240) = £1,188

    • Tax relief for 20% basic rate taxpayer = 20% of £1,188 = £237.60

    • ou contribute £950.40 (£1,188 - £237.60)

    • Your pension pot gets £1,188

The maximum contributions you can make while receiving tax relief depend on your relevant earnings in the UK. 

What are relevant UK earnings?

Relevant UK earnings include income from employment, self-employment, and other sources, such as salary, wages, bonuses, overtime, and profits.

What’s the Minimum Pension Contribution for Employers?

  • Minimum Contribution: Employers must contribute at least 3% of an employee’s qualifying earnings.

  • Tax Relief: Employers can claim tax relief by deducting their contributions as legitimate business expenses, reducing their corporate tax liability.

Example of Contributions:

Let’s say an employee earns £30,000 a year. 

  • Calculate their pensionable earnings (we’re using the qualifying earnings method):

    • Annual salary: £30,000

    • Qualifying earnings: £30,000 - £6,240 = £23,760

  • Employer Contribution:

    • 3% of £23,760 = £712.80 per year

  • Employee Contribution:

    • 5% of £23,760 = £1,188 per year

The total annual contribution (8%) to the employee’s pension would be £1,900.80.

So far, we’ve covered the minimum pension contribution, which is a great starting point.

But ask yourself: Does the minimum guarantee a comfortable retirement lifestyle for the employee?

If not, consider contributing more.

How Much Should Employees Contribute to Their UK Workplace Pension?

Deciding how much to contribute to your pension involves several factors, such as:

  • Desired Retirement Lifestyle: Do you plan to travel frequently, or are you looking forward to a quiet life in a small town? Your lifestyle goals will influence how much you need to save.

  • Current Income: A common rule of thumb is saving a percentage of your income corresponding to half your age. For example, if you're 30, aim to save 15% of your income.

  • Age: The earlier you start saving, the more you benefit from compound interest. Younger individuals can afford to save a lower percentage of their income. In comparison, older individuals may need to contribute more to catch up.

That said, it’s also important to contribute without facing any penalties. This is where annual allowance and adjusted income come into play.

What Are Annual Allowance and Adjusted Income?

The annual allowance is the maximum amount you can contribute to your pension in a tax year (6 April to 5 April of the following year) with tax relief. 

For most people, the standard annual allowance is £60,000 in May 2024.

If you contribute more than £60,000 to your pension in a tax year, you will face a tax charge — at your marginal rate — on the excess amount.

However, if your adjusted income exceeds £260,000, your annual allowance might be reduced. This means that you will have a lower amount you can contribute to your pension in a tax year without facing a tax charge.

Adjusted income is an employee’s total taxable income before any Personal Allowances and after deducting certain tax reliefs. This includes:

  • Earnings from employment or self-employment

  • Pension income

  • Dividend income

  • Rental income

  • Interest from savings

  • Pension contributions made by you or your employer

Now, you may be wondering…

Why You Should Contribute More Than the Minimum to Your UK Workplace Pension Plan?

Here's why paying in more to your workplace (or even a personal pension plan) is something you should consider:

Why Employees Should Contribute More

Contributing more to your workplace pension offers three key benefits:

  • Achieve your financial goals: Contributing more to your pension can significantly increase your retirement income, ensuring a more comfortable and financially secure life after you stop working.

  • Employers match contributions: Many employers offer to match your extra contributions up to a certain limit. If you decide to put in more money, your employer might add more, too, boosting your pension savings.

  • Additional tax benefits: Higher contributions can give you more tax relief, reducing your taxable income. This means you save on taxes while increasing your retirement savings.

Why Employers Should Contribute More

Employers can benefit from offering higher contributions as well. A generous employer pension contribution can help:

  • Attract top talent: People love a company that looks after their future and financial security. A competitive pension plan with generous contributions can be a major perk for potential hires.

  • Keep your best people: A good pension helps employees feel valued and secure, reducing turnover and keeping your A-team on board.

  • Save on taxes: Contributions to employee pensions can be tax-deductible for businesses, easing their financial burden.

Wondering what’s the best way to offer a competitive workplace pension plan to your UK team?

It’s Kota!

Easily Manage Employee Pension Contributions With Kota

Kota is a user-friendly digital pension app that simplifies workplace pension management in the UK. 

Partnering with Smart Pension, a reputable pension provider in the UK, Kota enables businesses to set up and manage pensions efficiently—regardless of their location or whether they have a UK bank account.

With Kota, you can:

  • Quickly enrol your UK employees in a workplace pension scheme.

  • Ensure compliance with UK auto-enrolment laws, which require a minimum of 8% total contribution to pension funds.

  • Postpone auto-enrolments for up to three months, with options for automatic postponement.

  • Manage re-enrolments every three years based on your pension contribution schedule.

  • Integrate with existing HR and payroll systems to minimise administrative tasks.

So why wait? 

Join Kota to enrol your team in affordable and compliant pension plans effortlessly.

We’ll answer some more questions about workplace pension contributions.

1. What Happens if an Employee Stops Contributing to Their Workplace Pension?

If you stop making contributions to your workplace pension, your employer may also stop contributing to your pension.

It will slow down the growth of your pension pot, as it will not receive new contributions from either you or your employer. But don’t worry!

Your pension pot will remain invested and continue to grow.

What if you decide to opt out of your pension plan?

You can do so within a month of enrolment to get a refund for any contributions you've made. After this period, you won't get a refund, but your existing pension pot will continue to earn investment returns.

2. Can I Contribute to a Pension After Retirement?

You can contribute to a pension after retirement. 

However, the amount you can contribute is limited by the annual allowance, which is £60,000 in May 2024. You may be subject to a tax charge if you exceed the annual allowance.

Moreover, you won't receive tax relief on contributions made after age 75.

3. How Does a Workplace Pension Differ from the NHS Pension, Personal Pension and the State Pension in the UK?

  • Workplace Pension: As explained above, workplace pensions involve contributions from both employees and employers, which are invested to build a retirement pot.

  • NHS Pension Scheme: The National Health Service (NHS) Pension Scheme is a defined benefit scheme for NHS employees. It offers a guaranteed retirement income based on salary and years of service, ensuring stability.

  • State Pension: Government-provided, based on National Insurance contributions, offering a basic retirement income for all qualifying UK residents upon reaching the state pension age.

Each pension type addresses different needs, offering unique benefits based on employment type and contributions.

4. Can I Pay More Into My Pension Pot Through Additional Contributions? 

You can boost your pension pot through additional voluntary contributions (AVCs) or making an additional pension contribution via your provider or employer.

Additional voluntary contributions are one-off or regular payments that you make to your pension scheme to increase your retirement savings.

Moreover, a salary sacrifice scheme allows you to exchange part of your salary for non-cash benefits like pension contributions. The scheme enables you to make extra pension contributions to boost your pension pot.

Aine Kavanagh

Article written by

Aine Kavanagh

👋🏻 Hi I'm Aine, Head of Customer Success at Kota. Whether you're a Kota customer, a Kota user, or you're just browsing, I hope to help educate and empower those who want to know more about owning their own benefits, and building financial autonomy 📚

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