Auto-enrolment pension: 8% of earnings between £6,240 and £50,270, worked for a client's employee

A client takes on a first employee, or an existing employee's pay creeps over £10,000 a year, and the client asks the plain question: what do I have to pay into the pension, and what comes off their wages? GOV.UK gives the percentages and the earnings band. The sums are short, but they are easy to get wrong because the percentage applies to a slice of pay, not to all of it. This guide works five pay levels.

What the source says

GOV.UK says the minimum total contribution into a workplace pension is 8%, of which the employer pays at least 3% and the employee at least 5%. The page dates these rates from April 2019 and says scheme rules can set higher amounts. The 8% is worked out on earnings between £6,240 and £50,270 a year before tax, not on the whole salary.

On who is put in the scheme, GOV.UK says a worker is enrolled automatically if they are aged between 22 and State Pension age and earn at least £10,000 a year. The same guidance lists amounts at or below which the employer does not have to contribute: £520 a month, £120 a week or £480 over 4 weeks.

The sums: five pay levels

The band is £50,270 - £6,240 = £44,030. Pay above £50,270 adds nothing to it; pay under £6,240 has nothing in it.

Checks, done twice:

• £28,000: £28,000 - £6,240 = £21,760. 3% is £652.80 and 5% is £1,088.00; £652.80 + £1,088.00 = £1,740.80, which equals 8% of £21,760. Monthly: £1,740.80 / 12 = £145.07 (to the penny, £145.0667).
• £10,000: £10,000 - £6,240 = £3,760. 8% of £3,760 = £300.80, and £112.80 + £188.00 = £300.80.
• £50,270 and £60,000: the band is capped at £44,030. 8% of £44,030 = £3,522.40; £1,320.90 + £2,201.50 = £3,522.40. £3,522.40 / 12 = £293.53.
• £520 x 12 = £6,240, so the monthly figure GOV.UK gives for the employer's no-contribution level matches the bottom of the annual band.

So an employee on £28,000 costs the employer £652.80 a year in pension on top of pay, and £1,088.00 is taken from the employee's pay. The cost of the employer's side of national insurance is a separate matter, covered in what a new hire costs a client.

Three points for the client conversation

• The £10,000 trigger is not the start of the band. An employee earning £10,000 is enrolled, but contributions only run on the £3,760 above £6,240. That is why the £10,000 row is small.
• Higher scheme rules. GOV.UK says scheme rules can set higher amounts than the minimum. These figures are the floor only.
• Payroll cost lands with other payroll costs. A pension line sits next to the Employment Allowance and student loan deductions when a practice builds the cost of a first hire.

What I did not read

I did not read how tax relief is applied to the employee's 5%, whether the employee side is taken before or after tax in a given scheme, the opt-out and re-enrolment rules, the deadline for a first assessment, or the Pensions Regulator's guidance for employers. The sums assume a straight 3% and 5% on the band, annual pay with no bonuses, and I have not checked any client's payroll or scheme rules.

Overlyft builds AI staff who join your practice team and take the new-starter pension task for a client, work out the band, the employer and employee amounts and the monthly figure for each payroll run, and show them for a person to approve before they reach the payroll.

This is general information, not legal or financial advice. Check the GOV.UK pages and your client's scheme for the case in front of you.