Employer pension contributions are simply payments your employer makes into your workplace pension scheme on behalf of you and the other members. Effectively, it’s free money, and that’s worth having!
By law your employer must auto enrol you into their workplace pension scheme and pay into it. For a typical defined contribution pension, in which you build up your own savings pot, the rules require your employer to pay contributions based upon a percentage of your earnings. The minimum they have to pay is 3% of your earnings, but it could be more, subject to limits.
In a defined benefit pension, there’s a single scheme covering all members. Your employer pays in to build up the guaranteed pension that you receive at retirement. The amounts they pay on your behalf vary depending on your age and salary, as well as other factors such as how long people live. The contributions are almost always higher than other types of pension, which is why the retirement benefits are so good.
Whatever your employer contributes to your pension, you’ll typically be required to pay in as well. Don’t forget, the government chips in tax relief on top to boost what goes in!
Yes, they can in two ways. Some employers don’t ask you to contribute as they pay all the pension contributions. The other way is called salary sacrifice. Sounds grizzly, but it actually isn’t! Effectively, you agree to give up enough salary to cover your pension contribution, and your employer adds this to their payment which is then paid to your pension as a single amount.
Salary sacrifice is a ‘win, win’ situation. You get tax relief as normal, and don’t pay National Insurance contributions (NI) on the salary you give up. Typically, your savings can be used to boost either your take home pay, or your pension payment. Your employer also saves because they can offset the pension payments against their business costs, and they also don’t pay NI on the income you give up.
Employers can treat the payments as an allowable business expense for corporation tax. They’re also not liable for employer’s national insurance payments on pension contributions they pay for you, which is different than if they were paying your salary. So, it’s tax efficient for them too.
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