How much are employer pension contributions?
Learn about average employer pension contributions in the UK, including minimum rates and how these contributions can impact your retirement savings.
Company pension contributions make workplace pension schemes much more attractive than personal pension schemes you arrange yourself.
In addition to your own contributions, your employer will also make payments into your pension on your behalf.
But they’re also good if you're an employer yourself. Not only are they a tax-efficient way to reward your workers, but you’ll also pay less national insurance.
Read on to find out the benefits of employer pension contributions for both workers and bosses.
What are pension contributions?
When you have a workplace pension, you and your employer both make contributions to it.
Thanks to auto-enrolment, it’s a legal requirement for employers to enrol eligible staff onto a pension scheme, but employees may opt out if they wish.
Both employees and employers are obliged to pay a minimum amount into a pension each month (though they may pay in more).
The money is invested for growth with the aim of providing you with an income for when you retire.
What are the minimum employee and employer contributions?
Under auto-enrolment, there are minimum contributions both you (the employee) and your employer must make, which are percentages of your salary.
This is 8% of your qualifying earnings and is made up of at least 3% from the employer, with the remainder paid by you (so 5% unless your employer pays in more).
| Contribution type | Minimum % of qualifying earnings | Who pays? |
|---|---|---|
| Employer | 3% | Employer |
| Employee | 5% | Employee |
Qualifying earnings are the amount earned (including bonuses and overtime) before income tax and NI contributions are deducted, between £6,240 and £50,270.
That means the first £6,240 of earnings aren’t included, or any earnings over £50,270.
Here's an example:
Bob is on a salary of £35,000 and earns £5,000 through overtime, so his qualifying earnings are £33,760 (£40,000 minus £6,240).
His employer must contribute a minimum of 3% of £33,760, so they’ll pay £1,012.80 a year into Bob’s pension fund.
Employers can pay more than the statutory minimum and may do so through other arrangements, such as a salary sacrifice pension scheme.
They may also base contributions on your whole salary, not just your qualifying earnings.
What is the maximum pension contribution in the UK?
How much your employer contributes will depend on the generosity of the arrangement.
If your employer uses the qualifying earnings system, for example, the percentage is based only on your earnings between £6,240 and £50,270.
This means that the maximum earnings your total contributions will be based on is £44,030, and with a contribution of 8%, you’ll get just over £3,500 going into your pension each year.
It also means that if your earnings are over £50,270, that income won’t be taken into account when your pension contributions are calculated.
However, your employer doesn’t have to base your pension contributions on your qualifying earnings and may pay in more.
You can also increase your contributions yourself.
You can pay in as much as you like into your pension and get tax relief on your contributions, so long as you stay within your pension allowances.
The maximum annual amount is either 100% of your salary or £60,000 a year, whichever is lower.
A tapered annual allowance may apply if your ‘threshold income’ is above £200,000 and your ‘adjusted income’ is above £260,000.
Company directors who take much of their income as dividends and pay themselves a low salary are more at risk of crossing this threshold.
If you have already made a taxable withdrawal from your pension, you may also have a lower allowance of just £10,000 a year. This is the money purchase annual allowance.
What is the average employer pension contribution in the UK?
Many employers offer higher pension contributions to incentivise staff to join and stay in their company.
For this reason, average employer contributions differ by sector based on what is seen as a competitive rate.
In financial services, for example, organisations contribute an average of 9.4% of their employees’ salaries.
Businesses in the energy sector contribute 8.4% of an employee’s salary on average.
On the bottom end of average contributions, construction sits at 3% and accommodation and food service sits at 2.3%.
| Industry | Median employer contribution rate |
|---|---|
| Finance and insurance | 9.4% |
| Energy | 8.4% |
| Construction | 3.0% |
| Manufacturing | 4.9% |
| Education | 5.8% |
| Accommodation and food service | 2.3% |
It is worth noting that the average employer contribution for men across all industries is 4.6%, and for women, it is 4.4%.
How to work out your employer pension contributions
It is worth calculating what your employer's pension contributions should be.
Doing so can help you determine how much you want to contribute (ideally above the minimum if you choose to stay in your workplace pension).
You should also know how much they contribute so you can spot if there are any mistakes with your pay.
Presuming your employer uses the qualifying earnings system, the first step to calculating your employer pension contributions is to find out the percentage they have committed to.
You should have this in a written confirmation, but if in doubt, ask HR.
Next, take your pre-tax salary and subtract £6,240 (employers don’t pay contributions on the first £6,240 of your annual earnings).
This figure is known as your qualifying earnings.
Then, you can work out your employer’s contribution by calculating the set percentage of your qualifying earnings.
Here's an example:
Priya’s salary is £37,000 and her employer contributes 6% to her pension. So, her employer pays 6% of £30,760 (£37,000 minus £6,240).
That means her employer contributes £1,845.60 a year, which is 6% of £30,760.
How can I make the most of my employer’s contributions?
Employer contributions are essentially extra pay; you just have to wait longer to spend it.
This means you should look carefully at the rules of your workplace pension and see how employer contributions work.
For instance, is the amount fixed, or does it change based on how much you contribute?
Some employers, for example, will match your payments, effectively doubling your contributions.
This means that every increase you make in your contributions will be boosted by your employer, too, creating a bigger incentive to save.
Here’s an example:
Isobel’s employer offers matching contributions.
If Isobel pays in the minimum of 5%, her employer pays in 10%, making 15% in total.
But if Isobel increases to 6%, her employer pays 12%, making 18%.
So, Isobel gets a significant increase in overall contributions at a relatively low cost.
Even if your employer’s contribution levels aren’t affected by your own, you can still maximise their impact by contributing as much as possible.
All contributions earn compound returns, so the bigger the sum, the faster the interest accumulates and grows.
Pension contributions if you’re the director of a company
Remember that only your income can be used to calculate your pension annual allowance – dividends don’t count.
So if you take most of your income as dividends (e.g. because you are a company director), your allowance is likely to be low because the pensions allowance is capped at 100% of your relevant earnings.
If you want to increase the limit, there are two ways: either increase your salary (which may increase the amount of income tax you pay), or make the pension contribution directly from your company as an employer contribution.
Can employers claim back their pension contributions from the government?
Employer pension contributions count as an allowable business expense, meaning you can deduct them from your taxable profits to reduce your corporation tax bill.
Moreover, employers don’t have to pay NI on pension contributions.
If you’re a contractor working under your own limited company, these rules mean that paying contributions directly from your company can be tax efficient.
When is it tax-efficient to contribute more to my pension?
Tax relief on pension contributions can make increasing the amount you contribute a tax-efficient way to save for the future.
Basic rate income taxpayers can claim 20% tax relief, higher rate taxpayers can claim 40%, and additional rate taxpayers can claim 45%.
| Taxpayer type | Tax relief rate |
|---|---|
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% |
Tax relief on pension contributions effectively reimburses the income tax that you’ve paid on that money.
It’s, therefore, tax-efficient to pay into your pension until you approach your annual allowance.
If you exceed these, you will face tax charges, which cancel out any tax savings. Remember, though, that you may be able to bring forward any unused annual allowances from the previous three years, using carry forward rules.
Get expert financial advice
Employer pension contributions are crucial in enhancing your retirement savings and offer tax advantages and additional financial security.
By understanding the minimum and maximum contribution requirements and leveraging any potential tax relief, you can make the most of your workplace pension scheme.
Whether you're an employee aiming to maximise your benefits or an employer looking to provide an attractive remuneration package, staying informed about pension contribution rules and strategies is essential for effective financial planning.
Let Unbiased match you with a financial adviser for expert financial advice on optimising your pension contributions and planning for a secure retirement.
If you found this article useful, you might also find our article on what to do if your employer hasn't paid your pension contributions informative, too.
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