Minimum contributions update for 2020-2021

Spring’s almost here, which means the new tax year – starting on 6 April – is also just around the corner. Here’s a quick reminder of what it means for employers and their staff in terms of auto enrolment into a workplace pension. If you’re an employer, you’ll need to make sure your payroll software updates are in place in time for this.

The three key factors are:

Trigger for auto enrolment

This trigger decides who’s automatically enrolled into a workplace pension. For the tax year 2020-2021 this will remain the same at £10,000. This is the minimum amount that someone needs to earn each year to qualify. We’ve set out the amounts for each pay period below:

2020-21

Annual

One week

Fortnight

Four weeks

One month

One quarter

Bi-annual

Earnings trigger for AE

£10,000

£192

 

£384

 

£768

 

£833

 

£2,499

 

£4,998

 

According to the Department for Work & Pensions (DWP), retaining this level, combined with predicted wage growth, will make an additional 80, 000 employees eligible for a workplace pension.

The DWP has also stated that many employers are supporting their lower-paid employees by enrolling non-eligible and entitled jobholders into workplace pensions, despite not being contractually obliged to.

Qualifying earnings band

This is the amount that employers use to calculate pension contributions. For 2020-21, the lower limit of the qualifying earnings band will increase from £6,136 to £6,240. This means the first £6,240 of an individual’s earnings don’t count towards auto enrolment contributions.

So, if an individual earns £20,000 a year, the amount their employer would calculate their qualifying earnings on would be £13,760. (£20,000 – £6,240 = £13,760)

This is also known as pensionable earnings. This is calculated using the following method:

Income (£20,000) minus lower limit of the qualifying earnings band (£6,240) equals pensionable earnings (£13,760).

We’ve set out the different amounts for each pay period below:

2020-21

Annual

One week

Fortnight

Four weeks

One month

One quarter

Bi-annual

Lower level of qualifying earnings

£6,240

£120

£240

£480

£520

£1,5660

£3,120

Upper level of qualifying earnings

£50,000

£962

 

£1,924

 

£3,847

£4,167

 

£12,500

 

£25,000

 

In another boost for employees, some employers are choosing to pay more than the minimum contributions – 3% for employers and 5% for employees – which have been set by the DWP.

The upper limit for contributions remains capped at £50,000.

Increase in lifetime allowance

For the 2020-21 tax year, the Lifetime Allowance will increase to £1.073 million from the current level of £1.055 million. This is the maximum amount that individuals can save into a pension while still receiving tax benefits enjoyed by pension savings.

Disclaimer

This information does not constitute financial or professional advice and is general in nature. For free and impartial guidance about your pension savings, please visit or contact:

  1. Pension Wise, pensionwise.gov.uk/ or call 0800 138 3944 to book a phone or face-to-face appointment.
  2. Citizens Advice Bureau (CAB), citizensadvice.org.uk/ or call 03444 111 445 for a face-to-face appointment.
  3. Pension Advisory Service, pensionadvisoryservice.org.uk or call 0300 011 3797.

These services will provide you with information, but not advice.

NP/B0010

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