Preparing for changes to workplace pensions rules

Preparing for changes to workplace pensions rules

Royal Assent was given on 18 September 2023 to extend the current workplace pension rules in a move which may result in significant changes for all employers and their workforces. At time of writing, there has been no confirmation as to when the changes will come into effect. We would anticipate that this could be as soon as April 2025, therefore it could prove beneficial to start assessing and planning for the impact now.

In this insight, we take a look at the current rules, the changes that have been announced, and how businesses can take action now in preparation.

The current rules

Automatic enrolment was introduced to the UK in 2012 and has ensured that an additional 11 million people have enrolled and are saving into a workplace pension plan. The current automatic enrolment criteria for employees are below:

• Aged between 22 and state pension age;
• Have earnings before tax of at least £10,000 per year (£833 per month or £192 per week)

To minimise the cost of pension contributions for both businesses and employees, many employers chose to use the qualifying earnings method of calculating pensionable pay. An employee's qualifying earnings is the total annual earnings between the Lower Earnings Limit (currently £6,240) and the Upper Earnings Limit (currently £50,270).

How the rules are changing

The changes which could have a significant impact on businesses and their workforces are:

• Change 1 - The Lower Earnings Limit has been abolished.

This means that where qualifying earnings is used as the definition of pensionable pay, an additional £6,240 per annum will be included within the pensionable pay calculation for each employee.

Minimal additional employer pension contributions of £187.20 per employee will be due per year, and an employee will pay an additional net pension contribution of £249.60 into their pension per year (£20.80 per month or £4.80 per week) based on the minimum statutory requirements.

Given the squeeze on businesses in the SME space, and the ongoing cost of living difficulties, this additional cost could have a substantial impact on businesses.

• Change 2 - The minimum age for automatic enrolment has reduced from 22 down to 18.

Businesses will be required to abide by the minimum automatic enrolment criteria of a 3% employer contribution on behalf of 18 - 21 year old employees who would previously not have been enrolled into the workplace pension scheme.

As an example, an 18 year old paid £16,000 per annum will now be automatically enrolled with the below contribution costs (including change 1):

• Employer contribution at 3% would be £480 per year.
• Employee net contribution at 4% would be £640 per year.

When will this change take place?

There has been no official confirmed date, however, the likelihood is this will occur in the 2025/26 tax year, given a change of this magnitude would be difficult to implement quickly.

How you can prepare

There are a few things businesses can do to plan for these changes:

• Consider operating a salary sacrifice scheme in respect of employee pension contributions, as it provides a very efficient method of reducing the pension scheme costs for both employers and employees.
• Review current pension arrangements. Increasing focus and spending on pension savings in the UK highlights that employers should ensure that their pension scheme is:
  • Achieving material compliance with the Pensions Act 2008.
  • Being ran efficiently and being effectively managed.
  • The investments within the pension are delivering a good member outcome.
• Undertake financial modelling to determine the anticipated impact of these future additional costs.

If you would like to discuss these changes, and how you can prepare further, please speak to our specialist Wealth Management team.

Information correct at time of publishing, but may be subject to change in future. This article is for general information only and is not intended to be advice to any specific person. You are recommended to seek professional advice before taking or refraining from taking action on the basis of the contents of this article.

Azets Wealth Management is a trading name of Azets Wealth Management Limited, which is authorised and regulated by the Financial Conduct Authority. Registered Office: Bulman House, Regent Centre, Gosforth, Newcastle upon Tyne, NE3 3LS. Company Number 05674020. Incorporated in England. Azets Wealth Management Limited is a subsidiary of Azets Holdings Limited.