Pensions Reform

Background

People are living longer and are therefore expected to require pensions for longer.

The State Pension is unfunded, meaning the benefits are paid directly from current workers' contributions and taxesi.e. the taxes we currently pay are not being put aside to cover our pension.

In the long term this means that when there are more people retired than working the burden on the current workforce would be too much.

Research by the Government has estimated that 7 million people are not saving enough for their pensions.

The Government are therefore shifting the onus on to employers and hence umbrella companies to ensure people are making pension savings.

Auto-enrolment

All umbrella company employees between the ages of 22 and state retirement age will  be automatically enrolled into a pension scheme (although they will have the option to opt-out).

Any that opt-out will be re-enrolled after 3 years.

Deadlines

This is scheduled to happen in stages between July 2012 and September 2018. A company’s deadline date is dependent on their number of employees.

For some of the larger umbrella companies this means that their deadline will be Q1 2013 (10,000 to 49,999 employees). For medium size umbrella companies like PayMatters the deadline will be Q3 2013 (1,250 to 3,999 employees).

What does this mean for Recruitment Agencies?

If contractors are working through an umbrella company or their own limited company then there are no issues.

If however they are being paid through the agency’s PAYE then the requirement to supply and contribute to a scheme will exist.

We would be happy to discuss transferring your PAYE workers to PayMatters umbrella company.

This can in most cases result in them earning a higher take home pay.

The Cost of Pension Scheme

As we are made aware of daily a contractor’s main concern is “how much is my take home pay”. Very few would choose less pay in return for a higher pension.

Pension Schemes come at a cost to both the employer and employee and will therefore impact on their earnings.

The level of combined contribution varies between 9 and 7% depending on if it’s based on pensionable earnings or P60 earnings (i.e. all earnings) and the minimum level of employers contribution included in this is between  4 and 3%.

Fortunately these contribution levels only come into full force from October 2018. Up to October 2017 Employers Contribution is 1% and Employee 0.8% and 0.2% tax relief i.e. total 2%.

What does this mean for Contractors working through an Umbrella Company?

The way Umbrella Company pay is calculated is that there is a bonus calculated on the surplus of cash they generate over the costs of employing them. The effect of Pensions Reform is that this bonus payment will take into account all costs incurred by the umbrella company including pensions contribution and therefore combined with their own contribution will result in a lower net pay.

This would therefore mean that there is a disparity between the cost to the end client of paying a temporary worker compared to a permanent employee and also to the benefits that the temporary worker would receive. Market forces may therefore dictate that the cost of temporary workers would have to increase to make them comparable?

Pensions are outside the scope of AWR but if an employee is receiving a pension at a lower direct cost then their comparable pay may be higher. The net effect is that the end client will have to help pay the employers contribution to the pension if this is the case.

For the lower paid contractors this may also affect how much is available to be paid in respect of expenses i.e. tax free and hence reduce take home pay further.

Some part time contractors i.e. those not working a full week may fall outside the scope of Pensions review if their annual earnings are under £7,475.

What Paymatters will do

Our illustration process can show a comparison of their take home pay based on opting in or out and also the effect on their expected pension.

We do however feel it be wrong to encourage all new joiners to opt-out and it is clearly a choice for each contractor to make.

We are working with Contractor Financials to provide a competitive pension scheme.

To contact PayMatters Umbrella and Accountancy Provider please call 0800 121 6513