Increase in Workplace Pension Contributions – Being Prepared for the After-effect in 2018/19

Automatic enrolment? Phasing? Mid-payroll increment? These are just a few terms that might set your heart racing and your brow sweating; it can be a stressful process making sure your business has prepared correctly for the recent changes to workplace pension contributions. While there is a clearly a legal obligation to comply with the April 2018 modification and an ethical outlook in caring for your employees’ future, there is also a financial impact on your business and this also must be planned for.

Adams Moore accountants in Tamworth can advise any business on preparing for financial changes with workplace pension contributions

Companies previously paid 1% of a staff member’s qualifying earnings. This has risen to 2% as of 6 April 2018 and the employee will now pay 3%. In certain circumstances the Government will pay a portion through tax relief or the company can choose to pay all of the minimum contribution, but either way the contribution must total 5%. From the start of the next tax year, on 6 April 2019, the total is going to jump further to 8%, meaning a 3% minimum contribution will be the responsibility of firms.

Since the scheme began, to help ensure people will be better provided for when at a pensionable age, more than 9 million people who had not taken out a pension plan have elected to stay in the system. The 1% provision by both employee and employer has been seen as a very manageable amount and didn’t impact the bottom line or pay packets too much, but sadly even next year’s 8% contribution will not secure a comfortable retirement for many and it should be seen as a baseline upon which to add to. Will the next 12 to 18 month be a rollercoaster ride that’s too much for some people to stomach? We’ve been advising our clients to strap in and keep their eyes open to avoid feeling too queasy about the changes.

Forecasting will more crucial than ever and monthly or quarterly management accounts will flag up what bearings the contribution increase is having on your books. Of course the only way of reducing a business’ contribution is if their employees choose to opt out of the scheme, which is not in the hands of employers; the Government believes over 21% of total UK workers will be opting out in 2018 and 27.5% in 2019, which is a sizeable leap from 10%, recorded in 2017. Younger employees are going to be more likely to opt out of the scheme over the coming year as student debt, high rent, saving to get on the property ladder or even ‘living life’ could be higher on their spending priority lists. Staff in their 50s and 60s also may think there’s not much time left to contribute and therefore opt out, and it has been found that women are more likely to decline the scheme than men due to part-time and lower incomes. Therefore, looking over the make-up of your workforce may be an indicator of how many staff may opt out, and this can be used in the planning process.

While there has been much chatter like these opting out examples and expectations, nobody really knows how it will play out, especially with how the fast approaching Brexit will shape the economy. We suggest businesses completely review their income and expenditure, so that all eventualities can be considered, pension related or otherwise, and costs can be absorbed without danger to the feasibility of the company’s future. It has been reported widely that businesses could start to delay rises in wages as they offset pension contributions and meet with April’s increase of the minimum wage from £7.50 to £7.83. This might seem like a sensible strategy on the face of it, but combined with increasing inflation and interest rates this may leave firms vulnerable when it comes to staff retention; the cost of recruitment and the effect a mutable workforce can have on customers and clients could quickly act against the original approach, leaving the company even more out of pocket.

Businesses must contribute to their employees' pensions, and this rises to 3 per cent in 2019.

Making savings can be done in a wide number of ways, and speaking to your business adviser and accountant is the first step in breaking down the numbers to see what areas can be improved on. Adams Moore welcomes new clients to undertake business reviews and for ongoing support, but here are some ideas on areas that companies can focus on:

> Review working practices and processes to increase performance

> Improve productivity by making changes within department structures and individual roles

> Settle contracts up front to obtain an annual discount

> Negotiate unit prices on larger orders

> Outsourcing services that have traditionally remained in-house, such as payroll

> Offer new or updated services based on customer or client requirements

> Analyse marketing and PR efforts to ensure they are making the proper return on investment

Key Things to Remember about Workplace Pension Schemes

> Ensure changes were effected on 6 April 2018 – payroll must accommodate the update, even if it was mid-pay cycle, to avoid legal action and a fine from The Pensions Regulator

> If none of your employees are currently eligible, the individuals must be assessed each time they are paid, and put into a pension scheme if the automatic enrolment criteria is met – obligations can be found here

> Staff meet the criteria if they are 22 years old or over but are under State Pension age, they earn more than the £10,000 per annum or £768 per month and work in the UK

> Employers and employees can choose to pay more than the minimum contribution levels

> After three years, employees must be re-enrolled if they meet the criteria, even if they have previously opted out