The Pensions Regulator

Guidance for employersGuidance for employers

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Deducting contributions from employee salaries

Contributions to a stakeholder pension

Where an employer provides access to a stakeholder pension, they must also offer the facility to deduct employee contributions from pay. However, employees can choose to pay pension contributions direct to the scheme themselves.

Setting the level of contributions

Employee contributions to a stakeholder pension scheme are voluntary. Once the employer has designated a scheme, employees wishing to contribute must individually decide how much they wish to contribute and how often.

The scheme is responsible for setting its own minimum contribution, but the law says that the minimum contribution cannot be set at more than £20. Contributions can be made weekly, monthly or at other intervals. One-off payments can be made at any time.

The contribution amount deducted from pay can be a:

• fixed sum agreed between the employer, the employee and the scheme provider; or
• a percentage of pay.

Whether pay (for calculation purposes) includes additional elements such as overtime is at the employers discretion.

Stakeholder pension contributions must be deducted from employees pay after tax, National Insurance and other compulsory deductions.

Changes to the amount contributed

When an employee joins an employers stakeholder pension scheme, employers must explain the process and rules for employees requesting a change to the amount they contribute.

No charge can be made for changes to the amount contributed to a stakeholder pension.

The amount can be changed at the individual employees request. However, an employee cannot request more than one change every six months - unless the employer agrees to more frequent changes.

The employee can ask for payroll deductions to stop at any time.

If the employer refuses to accept the employees request to change the amount contributed, then the employer must write to the employee and explain why. If the request has been refused because more than one change has been made within the last six months, then the employer should tell the employee when they can next request a change.

If an employee needs to change the amount contributed more frequently than every six months, it might be worth the employee paying into the scheme direct (rather than via the payroll).

There must not be any charge if a person stops paying into their stakeholder pension.

Making sure the correct amount is deducted

It is the employers responsibility to ensure that the percentage of pay has been calculated correctly and forwarded to the scheme provider.

The deduction is made from the employees net pay, which is defined as pay after the deduction of tax, National Insurance and other compulsory deductions.

If there is insufficient money to make the full deduction, then no deduction should be made.

The Inland Revenue determines the maximum amounts that individuals can contribute into a pension fund.

The scheme administrator will make a claim to the Inland Revenue for tax relief at basic rate for all members. The members' tax refunds will be sent to the scheme administrator by the Inland Revenue. Higher rate taxpayers may claim the balance of tax relief due through self assessment.

Making payments to the scheme on time

There are set time limits for paying over the employees and any employers contributions to the stakeholder pension scheme.

The employer must pay over the employees contribution to the scheme provider within 19 days of the end of the month in which the deduction was made. For example, deductions made in February will have to be paid by 19 March at the latest, regardless of the frequency of the deduction. Failure to do so is an offence, which could result in a fine. It would therefore be sensible to arrange a payment date early in the month.

If the employer decides to contribute to the scheme, they can agree a separate payment date with the provider for the employer contributions.

The provider will use the payment record as a monitoring tool to ensure that the correct payments are made and that they are received by the due date.

If the amount of employee contributions paid differs from whats shown on the payment record (perhaps the employee has decided not to contribute in a particular month), the employer must make sure that the provider knows why.

It is an offence for an employer to breach these requirements, and a breach could result in the employer being fined by the Pensions Regulator or even taken to court.

Payment methods

There are no defined methods of payment. It is for the employer and the scheme provider to agree the method.

Payment methods to the scheme could include:

• cheques sent direct
• direct credit
• direct debit
• Internet facility, using direct debit.

Providers are permitted to refuse to accept payments in cash or by credit card.

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