Stakeholder Pensions

Payroll Deductions

The Payroll

You must make sure your payroll system can cope with the deduction method you will be using.

If you provide access to a stakeholder pension, you must also offer the facility to deduct employee contributions from pay. However, if they wish they can choose to pay pension contributions direct to the scheme themselves.

Contributions

Employee contributions to a stakeholder pension scheme are voluntary. Once you have designated your scheme, employees wishing to contribute to it through payroll deductions must decide how much they wish to contribute and how often, and agree this with you.

Contributions can be made weekly, monthly or at other intervals.

One-off payments can be made at any time.

The scheme is responsible for setting its own minimum contribution, but the law says that this cannot be set at more than £20. Providers must accept payments of £20 or more. Some scheme providers may also accept payments for less than £20.

The Her Majesty's Revenue & Customs determines the maximum amounts that individuals can contribute into a pension fund.

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, based on either:
  • gross taxable pay (i.e. basic pay plus bonuses, commission, overtime, etc)
  • basic pay (i.e. does not include bonuses, commission, overtime, etc)

Amount and frequency of contributions should then be confirmed with scheme provider.

You are responsible for making sure that the employee's payment has been worked out correctly and sent to the scheme provider.

The contribution is made from the employee's net pay, i.e. it is deducted after tax, National Insurance and any other compulsory deductions have been made. Tax credits such as Working Families' Tax Credit are not treated as pay and cannot be used to pay pension contributions

If an employee does not have enough net pay to allow you to deduct the full agreed amount for the stakeholder pension scheme provider, you don't have to make a deduction. However, you can make another arrangement (e.g. the employee paying as much as they can afford) if you, the employee and the scheme provider all agree.

If your employee's wages are not enough to cover all deductions, you must make statutory deductions (e.g. tax, National Insurance) first before making voluntary deductions (e.g. pensions).

When an employee asks you to make payroll deductions, you must explain in writing within two weeks how you will run payroll deduction system. Your explanation should cover:

• how your employee can ask for a change in contribution (e.g. in writing, or by phone to a particular person)
• how often you will accept changes (this must be at least once every six months, but you can agree to make changes more often)
• that your employee can ask for their contributions to stop at any time
• your agreement to the employee's change in contributions being made no later than the pay period after the one that they made their request in

Changes To Contributions

No charge can be made for changes to the amount contributed to a stakeholder pension, nor if a person stops paying into their stakeholder pension

Your employee can ask for payroll deductions to stop at any time

If you refuse to accept your employee's request to change the amount contributed (e.g. if more than one change has been made within the last six months) you must explain why in writing

If your employee needs to make very frequent changes (more than every six months), it might be worth the employee paying into the scheme direct, rather than via the payroll

Tax Relief

Contributions are paid net of basic rate tax. However, higher rate taxpayers must reclaim the balance of tax relief due through self-assessment.