The qualifying earnings bands for the purposes of automatic enrolment are due to increase on 6 April 2019. For the tax year 2019/2020, the lower qualifying earnings threshold will be £6,136 (instead of £6,032) and the upper qualifying earnings threshold will be £50,000 (instead of £46,350). The old faithful earnings trigger will continue to remain stable at £10,000.
Why is this important?
Since October 2012, employers have had to make arrangements for certain workers in the UK to be automatically enrolled into a pension scheme that satisfies certain conditions (a qualifying scheme). Very broadly, workers fall into one of three categories (summarised below).
The Eligible Jobholders Group – the EJs
EJs must be automatically enrolled into a qualifying scheme (and must be given a right to opt out).
The Non-Eligible Jobholders Group – The Almost EJs
Almost EJs must be given the right to opt into a qualifying scheme. If they use this right, then they drop the “Almost” and hop over to the EJs group for the purposes of employer contributions. This means that if an Almost EJ joins a qualifying scheme, the employer must pay the same minimum employer contributions on his/her behalf as it would if the worker had originally been in the EJs group.
The Standalone Entitled Workers Group – the SEWs
SEWs must be given the right to join a pension scheme, but it need not be a qualifying scheme and, even if they do join a scheme, the employer does not have to pay the same minimum employer contributions on their behalf (although in reality, for administrative simplicity, employers often do).
The qualifying earnings thresholds have a role to play in determining which group workers are in and how much money their employer pays into a pension scheme on their behalf.
Group criteria refresher
An EJ is a worker who is:
- aged between 22 and the State Pension Age;
- is working ordinarily in the UK; and
- has qualifying earnings that exceed the earnings trigger (£10,000).
An Almost EJ is a worker who:
- is working mainly in the UK;
- has qualifying earnings that exceed the lower qualifying earnings threshold; and
- does not meet the criteria to be an EJ (e.g. is under age 22).
A SEW is a worker who has earnings below the lower qualifying earnings threshold.
What are qualifying earnings?
Qualifying earnings are, in essence, the gross earnings payable to a worker over a period of 12 months including various components of pay, such as:
- overtime; and
- statutory maternity, paternity, adoption and sick pay.
Qualifying earnings help categorise workers and determine the contributions an employer has to pay. However, given that most contribution structures are based on pensionable earnings/pay rather than qualifying earnings, employers can choose to satisfy alternative contribution requirements based on pensionable pay. Pensionable pay will vary from scheme to scheme and will be defined in the scheme’s rules, but typically only includes basic pay (i.e. excludes overtime and bonuses).
What does this all mean for employers?
While the change to qualifying earnings is unlikely to result in more workers joining the EJs group (given that the earnings trigger has remained at £10,000 and the lower earnings trigger has only increased by £100), the increase in the upper qualifying earnings threshold means that the minimum contributions employers have to pay will increase. This is because, suppose a worker meets the relevant criteria to be treated as an EJ and the employer pays contributions in relation to qualifying earnings, the employer will, for the 2019/20 tax year, have to pay contributions on all earnings between £6,136 and £50,000 making for a contribution on £43,864 (instead of £40,318). This means the employer has to pay contributions in respect of an additional c.£3,500 which, coupled with the increased contribution rates due to be introduced from April 2019 (more to follow on that), will (to some extent) increase the employer’s minimum liability, and employers should budget for this.