PayPerShop Forum

I wonder if anyone could help me with the following question:

Under our current group pension scheme, the company will make a matching contribution into the scheme provided the employee contributes above a 5% rate.

Due to the change in the basic rate of income tax from 22% to 20% from the 6th April, in order for our employees to maintain the gross contribution into the scheme at their current rate and therefore retain the employer’s contribution at the matching rate, the net contributions currently collected though payroll would have to be increased.

For example an employee earning £18000 per year making a 5% matching contribution would have a net deduction of £58.50 from his monthly salary, the total investment into his pension plan would be £58.50 + £16.50 (22% tax relief added back) total investment = £75.00 + £75.00 from employer

From the 6th April in order for the employee to continue to attract the matching employers 5% contribution, the employees % contribution would have to increase so that the net deduction would become £60.00 the total investment into his pension plan would be £60.00 + £15.00 (20% tax relief added back) total investment = £75.00 + £75.00 from employer

Although in normal circumstances we would not require the employee’s written authority to take an increase in contributions if their pensionable salary increases, in this particular case are we required to request written authority from each member to make the increase to their % contribution rate?

Regards,
Lesley

Welcome to the PayPerShop forum and thank you for the question...I think!

I assume from the explanation of the problem that the pension scheme you describe is not an occupational pension scheme - otherwise you would be deducting the £75 in your example from gross pay under the "net pay arrangement" and tax relief would automatically be provided at the employee's marginal rate of pay - the change in the basic tax rate would be irrelevant.

So, it appears that your company scheme is some kind of personal pension scheme, to which the "net pay arrangement" cannot apply. If the pension deductions are being made from net pay at a rate that is calculated by reducing the gross contribution by the basic rate of tax, the current deduction of £58.50 (i.e. £75 - 22%) will have to increase to £60 (i.e. £75 -20%) when the basic rate of tax falls to 20%, in order to maintain the £75 gross contribution.

Whether or not you need written approval to increase the deduction from £58.50 to £60 depends on what the pension scheme rules say (they are part of the employee's contractual terms) and whether the deduction the employee agreed to, presumably on a signed form, was the net or the gross amount.

If the scheme rules specifically refer to a 5% gross contribution and the employee signed a document agreeing to a deduction of the gross amount, then you can simply adjust the net deduction, so ensuring the employee's gross contribution stays the same. If, on the other hand, the employee authorised the net amount of the deduction, with the gross thereby dependent on fluctuations of the basis tax rate, you would have to obtain further authorisation to increase it to the level required to maintain the employer's matching contribution. Given the nature of your scheme, that the 5% of salary figure is the gross amount required to enjoy the employer's matching contribution, I would have expected the first of these situations to apply, but you will need to check the documents.

All of which makes me wonder what deductions I agreed to for my own personal pension scheme and whether my payments will change from April!

Ian, thank you for the swift reply.
It is indeed a personal pension plan, sorry for not being as specific as I should have been. The scheme rules do state the contributions are 5% of gross, I just thought that as a 'belt & braces' exercise I’d check it through with the experts.

Just one further thought - even though you already have written authority to take whatever net amount comes to 5% gross, it would be good to write to everyone affected to let them know that their net deductions will increase from week 1 of 2008/09, and explaining the reason for the increase.

I've included an explanation on this increase in the information pack I send to employees at the end of tax year.