Step one. Guide to earnings bases and contribution levels. Guidance for employers

Transcription

1 Step one Guide to earnings bases and contribution levels Guidance for employers V1

2 2 Contents Background page Preset choices to help you meet your duties 3 Earnings bases and contribution levels page Earnings bases Contribution levels 6 Qualifying earnings page Minimum contribution levels for qualifying earnings 9 Certification page Minimum contribution levels for tier Minimum contribution levels for tier Minimum contribution levels for tier 3 13 Custom earnings page 14 How tax relief works at NEST page How do I know if a worker is eligible for tax relief? What if the worker isn t eligible for tax relief? 16 NEST s annual contribution limit page 17 Late payments page 18 Glossary page 19 About this version page 20

3 3 01 Background When you enrol your workers into NEST you ll need to assign them to a group. As part of setting up a group or groups of workers, you ll need to decide how much you and your workers will be contributing on a regular basis. To do this there are two settings you ll need to choose for each group: earnings basis contribution level. You ll need to set up a different group for every combination of earnings basis and contribution level you decide to use. Groups are collections of workers who share the same: contribution levels and earnings basis frequency of contributions earnings periods payment due dates. We ve created this guide to help you understand what the different earnings bases are and how their minimum contributions vary. You ll find case studies showing how different contribution levels and earnings bases might work for workers in your organisation. We ll also tell you how you can work out tax relief on your workers contributions if they re eligible. As you might not be familiar with some of the terms we use, we ve included a glossary at the back of this guide to help you understand them. When you re setting up your groups you ll also need to add your payment frequency and pay dates. Our website provides clear instructions on how to set up a group. Just follow the onscreen steps or see our separate guide How to set up NEST. 1.1 Preset choices to help you meet your duties When you set up a group you can choose one of our preset contribution levels. These are designed to make sure you pay what you need to for your workers. However, it s your responsibility to enter a worker s pensionable earnings correctly in each contribution schedule to ensure you pay the minimum contribution.

4 4 Workers without qualifying earnings (WWQEs), also known as entitled workers These are workers earning 5,668 or less for the 2013/14 tax year. You don t have to pay any minimum contributions for these workers. You ll need to enrol these workers if they ask you to. It s up to you whether you make contributions or not and if so, how much. If you re not going to make contributions for these workers and don t want to manage their contributions to NEST you ll need to ask them to arrange payment directly with us. However, you ll still need to enrol them into NEST yourself. Salary sacrifice If you have a salary sacrifice agreement with your worker, you need to ensure you ve set the correct levels of contributions for each worker in the group. These contribution levels need to be based on post-sacrifice pay. The contributions need to be set up as All employer contributions.

5 5 02 Earnings bases and contribution levels 2.1 Earnings bases You ll need to tell us the earnings basis you re using so we can work out what contributions to expect for your workers in each pay period. This means telling us what parts of the worker s earnings the contributions will be based on. For example, suppose you ve set the employer contribution to 3 per cent of the worker s earnings. This 3 per cent contribution could be a very different amount, depending on what parts of the worker s pay you choose to take into account. There are three different earnings bases you can choose from that change the pensionable earnings you ll calculate contributions on: qualifying earnings certification custom earnings. These options will help you define what the pensionable earnings are for your workers. Every pay period you ll need to tell us the amount of earnings each worker has, based on your chosen earnings basis. These are the figures you ve used in your payroll calculations. We call these earnings pensionable earnings. You ll also need to provide minimum contributions based on these earnings. We ll use the figures you ve given us to confirm you ve paid the minimum contributions due. Why might you choose one earnings basis over another? You ve got the flexibility to choose which earnings basis best suits your needs. For example, you may find certification is an easy way to work out contributions, as you can base it on basic or total pay. However, your choice will affect the minimum contribution rates you ll need to pay to meet your employer duties. There s more about this in section 3. Before you decide which earnings basis to use, you ll need to understand what its minimum contributions are.

6 6 2.2 Contribution levels A minimum contribution level is the minimum percentage of each worker s pay that should be paid in contributions based on the earnings basis you ve chosen. It s up to you what level you set but you ll need to pay at least the minimum level for each worker, in line with your employer duties. You can pay more than the minimum level if you want to, for example as part of a reward package. Just remember there s a NEST annual contribution limit that you should avoid going over. This limit is 4,500 per member for the 2013/14 tax year. This figure will be adjusted annually in line with increases in average earnings. Choosing contribution levels Phasing Minimum levels of contributions from employers and members are being phased in. They were introduced at a lower rate in October 2012 and will increase over time. The table below shows how the minimum contribution levels will change over the next few years if you re using qualifying earnings as your earnings basis. Date October September 2017 October September 2018 October 2018 onwards Minimum contributions (as a percentage of a worker s qualifying earnings) Minimum contribution: 2 per cent. The employer must pay at least 1 per cent of this. Minimum contribution: 5 per cent The employer must pay at least 2 per cent of this. Minimum contribution: 8 per cent The employer must pay at least 3 per cent of this. You may need to increase the contributions you re paying to keep in line with the increasing minimum levels. To make this easy, NEST offers a number of preset options.

7 02 Earnings bases and contribution levels 7 Basic-phased If you pick the basic-phased setting we ll automatically set contribution levels to the minimum levels required that year, based on the earnings you provide when you send us your contribution data. Basic-quick start If you pick the basic-quick start setting we ll automatically set contribution levels to the minimum levels required in October 2018, when the phasing period ends. For example, if you re using qualifying earnings as your earnings basis the minimum contribution will be 8 per cent, of which you as the employer must pay at least 3 per cent. Custom If you pick the custom setting you have the flexibility to set your own contribution levels. However, the amount you pay must be at least equal to the minimum contribution levels as set out by law under the new employer duties.

8 8 03 Qualifying earnings If you choose qualifying earnings as your earnings basis you ll be contributing a percentage of the worker s gross annual earnings that fall between 5,668 and 41,450. The first 5,668 of their earnings isn t included in the calculation. For example, if a worker earns 20,000 their qualifying earnings would be 14,332. Worker s annual earnings Worker s qualifying earnings 5,000 0 (this worker has no earnings in the band) 20,000 20,000-5,668 = 14,332 50,000 41,450-5,668 = 35,782 This means that qualifying earnings can t be more than 35,782 ( 41,450 minus 5,668) for the 2013/14 tax year. These are annual figures. Because you pay contributions every pay period, you ll need to work out qualifying earnings for each pay period in turn. The table below shows the lower and upper levels of qualifying earnings relating to a worker s pay period. Pay period Lower level of qualifying earnings Weekly Fortnightly 218 1,594 Four-weekly 436 3,188 Monthly 473 3,454 Upper level of qualifying earnings Entitled workers These workers don t have any earnings within the qualifying earnings band for the pay period. This means their qualifying earnings for the pay period will be zero. If you ve enrolled any of these workers you ll still need to tell us their qualifying earnings for each pay period, even if this figure is 0. To do this, you ll need to select a reason for partial or non-payment of contributions. Select Member has insufficient earnings for each pay reference period while the worker remains in your employment.

9 9 3.1 Minimum contribution levels for qualifying earnings If you want to comply exactly with the minimum contribution levels you may want to choose qualifying earnings. That s because minimum contributions are strictly based on a percentage of this particular earnings basis. Minimum contributions are calculated for each pay reference period. So if the worker received no qualifying earnings for a pay reference period then no minimum contributions would have to be paid for that period. Case study A worker earns 1,000 in May You ll need to work out contributions based on their qualifying earnings. The qualifying earnings will be 1,000 minus 473 as the first 473 is outside the band. This comes to 527 which is the earnings in the band. The minimum contribution is calculated as a percentage of the qualifying earnings of 527. Up to October 2017, the minimum contribution is 2 per cent of 527. You pay half this amount - 1 per cent though you could pay more. The remainder of this 2 per cent will come from the worker s contributions. In this example we ve assumed they re eligible for tax relief. The minimum contribution is 2 per cent of 527 = Your employer contribution is 1 per cent of 527 which is The worker s contribution is 1 per cent of 527 which is split into: per cent from their pay, which is per cent tax relief of The total to send to NEST will be = We ll then ask the government to send us the remaining 0.2 per cent tax relief of 1.05 which we ll add to the worker s retirement pot when we receive it. You can read how tax relief works at NEST in section.

10 10 04 Certification Using certification as an earnings basis means you can choose a definition of pensionable earnings in line with the tiered approach. You can decide if you want to include bonuses, overtime, performance-related pay and other earnings related to the worker s employment with you. There are three different types, or tiers, of certification bases to choose from. All of them start from the first pound of earnings. For tier 1, pensionable earnings must be equal to or more than the worker s basic pay. For tier 2, total pensionable earnings of all workers must be at least 85 per cent of their total earnings. The pensionable earnings must be equal to or more than the worker s basic pay. Tier 3 includes all earnings as pensionable earnings, which means you need to include wages, commission, overtime, bonuses, performance-related pay and any other earnings the jobholder has been paid by you. Maintaining a certificate If you re using certification you ll need to complete a certificate at least every 18 months. If there s a significant change to any of the information in the certificate you ll have to fill out a new one. Examples of significant changes could be: big changes to your organisation, such as mergers and acquisitions changes to the contribution rate changes to your pay and reward structure. It s your responsibility to complete and maintain your certificate. You can find a template of the certificate you need to fill out in Annex E of the Money purchase schemes guidance (PDF) from the Department for Work and Pensions. On the certificate you ll also need to declare what type of scheme NEST is. NEST is an occupational money purchase scheme. As with many other records of your workers, it s part of your employer duties to keep a copy of the certificate for six years.

11 04 Certification Minimum contribution levels for tier 1 Date October 2012 September 2017 (Introductory rate) October 2017 September 2018 (Introductory rate) October 2018 onwards (Full rate) Minimum contributions (as a percentage of a worker s qualifying earnings) Minimum contribution: 3 per cent Of this, the employer must pay at least 2 per cent Minimum contribution: 6 per cent Of this, the employer must pay at least 3 per cent. Minimum contribution: 9 per cent Of this, the employer must pay at least 4 per cent Case study 1 A worker s basic salary is 1,000 in March You ve put the worker in a group that uses tier 1 certification as its earnings basis. This means you ve decided to use just basic salary for the worker s pensionable earnings. The minimum contribution is calculated as a set percentage of the 1,000. Up to October 2017, the minimum contribution is 3 per cent of 1,000. Of this, you as the employer must pay at least 2 per cent. The other 1 per cent will be made up in full or in part by the worker s contribution. In this example the worker is also eligible for tax relief. The minimum contribution for this period is 3 per cent of 1,000 = 30. Your employer contributions are 2 per cent of 1,000, which is 20. The worker s contribution is 1 per cent of 1,000, which is split into: per cent from the worker s pay, which is per cent tax relief of 2. The total to send to NEST will be = 28. We ll then ask the government to send us the remaining 0.2 per cent tax relief of 2, which we ll add to the worker s retirement pot when we receive it. If the worker isn t entitled to tax relief you ll also need to deduct an additional 2 from the worker s pay and add this to the amount you send NEST. You can read how tax relief works at NEST in section.

12 Minimum contribution levels for tier 2 Date October 2012 September 2017 (Introductory rate) October 2017 September 2018 (Introductory rate) October 2018 onwards (Full rate) Minimum contributions (as a percentage of a worker s pensionable earnings) Minimum contribution: 2 per cent Of this, the employer must pay at least 1 per cent Minimum contribution: 5 per cent Of this, the employer must pay at least 2 per cent. Minimum contribution: 8 per cent Of this, the employer must pay at least 3 per cent Case study 2 A worker s basic salary is 1,000 in March Because the worker s basic salary is always at least 85 per cent of their total pay, you ve decided to put the worker in a group that uses tier 2 certification as its earnings basis. Minimum contributions are then calculated as a set percentage of 1,000. This means that the calculation is easier than if you d chosen to use qualifying earnings. Up to October 2017, the minimum contribution is 2 per cent of 1,000, of which you as the employer pay 1 per cent. The other 1 per cent will be made up in full or in part by the worker s contribution. In this example the worker is also eligible for tax relief. The minimum contribution for this period is 2 per cent of 1,000 = 20. Your employer contribution is 1 per cent of 1,000, which is 10. The worker s contribution is 1 per cent of 1,000, which is split into: per cent from the worker s pay, which is per cent tax relief of 2. The total to send to NEST will be = 18. We ll then ask the government to send us the remaining 0.2 per cent tax relief of 2, which we ll add to the worker s retirement pot when we receive it. If the worker isn t entitled to tax relief you ll also need to deduct an additional 2 from their pay and add this to the amount you send NEST. You can read how tax relief works at NEST in section 6.

13 04 Certification Minimum contribution levels for tier 3 Date October 2012 September 2017 (Introductory rate) October 2017 September 2018 (Introductory rate) October 2018 onwards (Full rate) Minimum contributions (as a percentage of a worker s total earnings) Minimum contribution: 2 per cent Of this, the employer must pay at least 1 per cent Minimum contribution: 5 per cent Of this, the employer must pay at least 2 per cent. Minimum contribution: 7 per cent Of this, the employer must pay at least 3 per cent Case study 3 A worker s basic salary is 1,000 in March 2013 but they also earn overtime and bonuses of 500 that month. So their total pay is 1,500. You ve put the worker in a group that uses tier 3 certification as its earnings basis. This means that the minimum contribution is calculated on the full 1,500. Up to October 2017, the minimum contribution is 2 per cent of 1,500, of which you as the employer pay 1 per cent. The other 1 per cent will be made up in full or in part by the worker s contribution. In this example the worker is also eligible for tax relief. The minimum contribution for this period is 2 per cent of 1,500 = 30. Your employer contribution is 1 per cent of 1,500, which is 15. The worker s contribution is 1 per cent of 1,500, which is split into: per cent from the worker s pay, which is per cent tax relief of 3. The total to send to NEST will be = 27. We ll then ask the government to send us the remaining 0.2 per cent tax relief of 3, which we ll add to the worker s retirement pot when we receive it. If the worker isn t entitled to tax relief you ll also need to deduct an additional 3 from the worker s pay and add this to the amount you send NEST. You can read how tax relief works at NEST in section 6.

14 14 05 Custom earnings Using a custom earnings basis allows you to calculate your contributions based on any other method of pensionable earnings that s appropriate for you. You ll need to make sure that your contributions are at least as much as the legal minimums based on qualifying earnings. Rather than use qualifying earnings or the alternative earnings bases already discussed, you may decide you want complete flexibility over your earnings bases and contribution levels. NEST lets you do this. By choosing the custom option you can set your earnings basis and contribution levels to whatever you want. It s up to you to ensure that the amounts you pay are at least as much as the minimum contribution levels set out by the new employer duties. This is a legal requirement. Case study A worker s basic salary is 1,000 in March for the 2012/13 tax year and they earn no overtime or bonuses in the month. So their total pay in March 2013 is 1,000. You ve put them in a group that uses a custom earnings basis, paying contributions for every pound above 250 for a calendar month. You ve also set the contribution level to custom and chosen 2 per cent employer and 2 per cent member contributions. Qualifying earnings will be 1,000. This is 1,000 minus as the first 750 is outside the qualifying earnings band. The total contributions for March will be 4 per cent of 750 = 30. Employer contribution are 2 per cent of 750 = 15. Member contributions are 2 per cent of 750, which is split into: per cent from the worker s pay, which is per cent tax relief of 3. The total to send to NEST will be = 27 We ll then ask the government to send us the remaining 0.4 per cent tax relief of 3, which we ll add to the member s retirement pot when we receive it. If the member isn t entitled to tax relief, you ll also need to deduct an additional 3 from your worker s pay and add this to the amount you send NEST. Both your overall contribution and your employer contribution are well above what you need to pay as the minimum, so you know you ll be meeting your duties.

15 15 06 How tax relief works at NEST When you pay contributions to NEST on behalf of a worker they re made up of employer contributions and member contributions. Employer contributions are set at a level you ve agreed with us. Member contributions are a little more complicated, as they depend on whether the member is eligible for tax relief or not. 6.1 How do I know if a worker is eligible for tax relief? Workers are eligible for tax relief if they meet the following criteria: they have UK earnings that are subject to income tax for the tax year they re resident in the UK at some time during the tax year they were resident in the UK at some time during the preceding five tax years and when they joined the pension scheme. The maximum amount of contributions on which a member can claim relief is whichever of the following is greater: the basic amount - currently 3,600 the amount of the individual s UK earnings for the tax year. This means that a member who has no relevant UK earnings may still qualify for tax relief on contributions into a registered pension scheme up to the basic amount. In these circumstances tax relief can only be applied if the contributions are made to a scheme that operates the relief at source (RAS) system. The tax relief is available even if the member is a non-taxpayer. To claim tax relief on behalf of your workers we ll need their National Insurance (NI) number. We won t be able to claim their tax relief without it, so if they have one make sure you ve included it with their enrolment details. The only exception is when they re an overseas worker waiting for an NI number to be given to them. In this case we ll be able to claim tax relief for them without an NI number. If any of your workers don t have an NI number they ll need to get one from DWP. They ll then need to add it to their personal details using their online NEST account or give it to you to pass on to us. If we have your worker s NI number, we ll assume that the workers you enrol in NEST are eligible for tax relief unless you or they tell us otherwise. If you think a worker who has an NI number isn t eligible for tax relief, you need to contact us on

16 16 You can get more information on qualifying for tax relief by visiting hmrc.gov.uk. It s your responsibility to check with them if you re unsure about a worker s eligibility for tax relief. You agree to this when you accept NEST s Employer Terms and Conditions. What you set and what you send When you re setting up your groups and choosing your contribution levels, the percentages showing for member contributions will include the tax relief amount. For instance, if you set 1 per cent as the member contribution amount this will be made up of: 0.8 per cent member contribution this is what you send 0.2 per cent tax relief this is what NEST claims from the government. The member contribution level you set is higher than the amount you actually send if the member is eligible for tax relief. 6.2 What if the worker isn t eligible for tax relief? The process will be the same. The only difference is that the contribution you take from the worker s net earnings will be 100 per cent of the figure you ve calculated for the member contribution. So, if you set 1 per cent as the contribution amount you d send a 1 per cent member contribution.

17 17 07 NEST s annual contribution limit NEST s annual contribution limit is the maximum amount that can be contributed to any member s retirement pot in a tax year. The contribution limit for the 2013/14 tax year is 4,500. This figure will be adjusted annually in line with average earnings. The limit applies to the period 6 April 2013 to 5 April It s independent of both the worker s joining date and the date you start using NEST. For example, if you started using NEST in January 2014 and you enrol a worker in the same month, up to 4,500 can be paid into the member s retirement pot in the remaining four months of the 2013/14 tax year without going over the limit. The following year the limit would apply across the whole of the 2013/14 tax year. Transfers into NEST Minimum contributions from more than one employer We ll always accept minimum contributions to the member s retirement pot, even if they exceed the annual contribution limit. This might happen when a member has two or more employers at the same time who are using NEST. What happens if you pay more than NEST s annual contribution limit? Any contributions over NEST s annual contribution limit will be held in cash in the member s account until the end of that tax year. At this point we ll normally refund the contributions to the member, the government or yourself as the employer. Members may also have other choices about what to do with these extra contributions, such as adding them to their retirement pots in the following tax year. We ll ask the member what they want to do at the end of the tax year. We ll refund contributions in this order: additional member contributions excess member contributions excess employer contributions.

18 18 08 Late payments It s part of your employer duties to send contributions on time. It s against the law to hold on to worker contributions past the payment due date, except where the worker is still in their opt-out period. The latest date we should receive contributions deducted from a worker s earnings is the 22nd of the following month after the contribution is taken, unless you select an earlier payment due date when setting up the group. If contributions aren t paid on time as set out in the contribution schedule you sent to NEST, it could mean we have to tell The Pensions Regulator. A payment due date means the date the payment must have cleared in NEST s account, so you ll have to send the payment earlier than the date selected to make sure we receive it on time. If we receive the contribution later than this date we ll regard it as late. The timings we ve set out below are only to give you a rough idea of how long payment will take using the different methods available. The exact timings will vary depending on the bank you use and the time of day you make the payment. Please speak to your bank for more information. If you ve chosen to pay by Direct Debit you should set up the mandate at least 11 working days before it s due to make sure the payment reaches us on time. You ll need to allow four working days for subsequent payments. Once it s successfully set up, the advantages of Direct Debit are: - less risk of errors and late payments - you don t have to do anything apart from provide us with your completed contribution schedule. If you ve chosen to pay by direct credit then you ll need to send the payment at least six working days before it s due, to make sure it reaches us on time. If you ve chosen to pay by debit card then you ll need to send the payment at least four working days before it s due to make sure it reaches us on time. Payments for members within their opt-out period may be paid after the payment due date, but no later than the date set out in the Occupational and Personal Pension Scheme (Automatic Enrolment) Regulations 2010.

19 19 09 Glossary Basic pay this is a worker s pay from the first pound. It excludes overtime, bonuses and commission. It s only their basic salary. Certification a way for an employer to set an alternative earnings basis to calculate minimum contributions if they don t want to use qualifying earnings. It s been designed for employers who want to use basic pay to calculate their contributions. Qualifying earnings this is the band of gross annual earnings on which contributions are calculated. For the tax year 2013/14 this means earnings between 5,668 and 41,450. These figures apply to the 2013/14 tax year and will be reviewed every year by the government. Pensionable earnings earnings on which pension contributions are paid. They must be at least basic pay for the purpose of certification, from the first pound upwards. It s up to the employer to decide how they want to determine pensionable earnings beyond this. For example, pensionable earnings could include bonuses, overtime, commission or location allowances or a combination of these, in full or in part, in addition to a worker s basic pay. Total earnings the total sum of any of the following descriptions that are payable to the worker in relation to their job: salary, wages, commission, bonuses and overtime statutory sick pay under Part 11 of the Social Security Contributions and Benefits Act 1992 (c. 4) statutory maternity pay under Part 12 of that act ordinary statutory paternity pay or additional statutory paternity pay under Part 12ZA of that act statutory adoption pay under Part 12ZB of that act.

20 20 10 About this version Version history Version Date What s changed? August 2012 Initial version cleared for early release to NEST s transactional site October 2012 Approach to entitled workers clarified 1 28 March 2013 Some sections have been reordered A change in the process of enrolling workers without qualifying earnings Case studies are now based on monthly rather than yearly salary. We keep changes to a minimum NEST s online accounts mean you and your delegates can do almost everything you need to online. We ll make regular updates so we can ensure you have the best possible experience of using NEST. We know you need NEST to work with your HR and payroll systems so we ll try to avoid changes that affect existing processes. Sometimes we ll need to make changes to our file templates because of things outside our control, such as regulatory changes. If that happens we ll make sure we minimise disruption and we ll give you plenty of time to start using the new templates. Future service releases Future service releases will include new functionality for both you and your members. The changes will usually be introduced in two or three service releases each year. You shouldn t need to change anything but we ll let you know in advance if you do.

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22 NEST Nene Hall Lynch Wood Business Park Peterborough PE2 6FY Contact us Call: To find out more visit our website nestpensions.org.uk NEST Corporation All rights reserved. This information is indicative only and may be subject to change. We don t give any undertaking or make any representation or warranty that this document is complete or error free. We don t accept responsibility for any loss caused as a result of reliance on the information contained in this document, which is intended to be for guidance only, nor do we accept responsibility for loss caused due to any error, inaccuracy or incompleteness. Reproduction of all or any part of this document or the information contained in it is not allowed. NS086 OBT2 03/2013