What is a pension?
A pension is a tax-efficient way of saving money for retirement. Essentially, it allows individuals to build up their savings during their working years, with a view to spend those savings as income when they retire.
What is a company pension scheme?
A company pension scheme, also known as an occupational or workplace pension, is a retirement savings plan set up by an employer for the benefit of its employees.
Under these schemes, both the employee and the employer make regular contributions towards the employee's retirement. The total amount in their pension pot will depend on the amount contributed, how long they've been making contributions for, and the investment performance of the fund.
What are the different types of private pensions?
There are two main types of company pension schemes in the UK:
Defined benefit (DB) pension schemes
These are also known as 'final salary' or 'career average' schemes. With this scheme, the money you receive when you retire is based on your salary and how long you've been in the pension scheme.
With the defined benefit scheme, you receive regular income for life, typically in monthly instalments. These payments will increase in line with inflation.
There are two types of defined benefit pension:
Career average: this is calculated based on an average of your salary from when you joined the scheme up until retirement, or if you choose to leave the scheme
Final salary: this is calculated based on your salary at the time you retire or leave
Defined contribution (DC) pension schemes
With a defined contribution pension - also known as 'money purchase' schemes - you build up a "pot" of savings and are able to choose how and when you want the money when you retire.
The money paid into your DC pension is put into investments by the pension provider, which means the value of the pot can fluctuate depending on how those investments perform.
You can typically take up to 25% of the amount built up as a tax-free lump sum. The most you can take is £268,275 (gov.uk).
What are the benefits of a pension scheme?
Benefits for employees
Pension schemes help you prepare and save for retirement
Contributions are automatically deducted from your salary, so you don't have to think about saving for your future
Contributions are also typically eligible for tax relief, which essentially means that the government will add money to your pot
Many pension schemes offer additional benefits like life insurance
Benefits for employers
Offering a pension scheme to employees is not just a legal requirement for most UK employers, but also an important part of your overall compensation and benefits package.
Competitive pension schemes are a valued employee benefit that can help attract and retain talent
Employer contributions are typically viewed as a business expense, which can reduce corporation tax bills
If employees feel more financially secure about their future, they may feel less stressed in the workplace, leading to a more engaged and motivated workforce
Do you have to set up a pension plan for your limited company?
As outlined in the Pensions Act 2008, it's mandatory for all UK employers, including limited companies, to set up a pension scheme for their qualifying employees.
Since 2012, all employers in the UK are legally obliged to automatically enrol their employees into a pension scheme if they are aged between 22 and State Pension age, earn more than £10,000 per year (£833 per month, or £129 per week), and work in the UK. This is known as automatic enrolment.
Employees can opt out if they wish but, if they stay opted in, both the employer and employee need to contribute towards their pension pot.
If you're self employed and the director of your own limited company, it may not be mandatory to set up a pension as you could be exempt from duties under automatic enrolment. However, it's well worth doing as it's one of the most tax efficient ways to save for retirement.
What happens if you don't set up a pension scheme as an employer?
If you fail to set up an auto-enrolment pension scheme, you risk facing penalties from The Pensions Regulator.
They have the authority to enforce compliance and can issue escalating penalties. The fines can range from a £400 fixed penalty to a varying daily rate ranging from £50 to £10,000, depending on the size of your business. More severe cases of non-compliance can even result in court action, which could have further financial implications.
Outside of these penalties, not offering a pension scheme can damage a business's reputation. It can also lead to employee grievances and lowered morale as a pension is now seen as a standard benefit in full-time employment.
What are the minimum pension contributions in 2025?
As of 2025, the minimum total contribution to a pension scheme is set at 8% of an employee's qualifying earnings - at least 3% of this must come from the employer. The remaining 5% is typically covered by the employee, with tax relief adding a portion as well.
These are the minimum legal requirements and many employers choose to contribute more as an attractive perk for employees.
The rules around pension contributions are subject to changes in UK pension law, so it's important to stay on top of the latest legislation.
Salary sacrifice pension schemes
Many companies choose to offer salary sacrifice pension schemes. This is where an employee agrees to give up a portion of their gross salary and, in return, the employer pays that amount directly into their pension. This method can lead to savings on National Insurance for both parties, making it a very tax-efficient way to boost retirement savings.
How to set up a pension plan
Step 1: Choose a scheme
The first step in setting up a pension scheme for your limited company is choosing the scheme that's most suitable for your business. This scheme should be accessible, allow for automatic enrolment of all eligible staff and facilitate the minimum legal contributions.
Step 2: Enrol your employees
Next, you need to enrol all eligible employees onto this scheme.
As a reminder, eligible employees are typically aged between 22 and State Pension age, and earn more than £10,000 a year.
Step 3: Set up your contributions
Once the enrolment process is completed, set up regular contributions to your employees' pension scheme. These should be deducted from employees' wages and paid into their pension pots.
Step 3: Maintain records
Lastly, it's important that you maintain accurate records of your pension scheme, including members, their earnings, and the contributions made. This will help ensure compliance and accuracy in the event of audits or inspections.
How to calculate company pension contributions
Calculating your pension contributions involves a careful examination of your employees' qualifying earnings.
Qualifying earnings are a band of an employee's salary that falls between a lower and upper limit that's set by the government each tax year. For the tax year 2025/26, this band is set to £6,240 from £50,270. Pension contributions are calculated on the employee's income that falls between this range, not their full salary.
Qualifying earnings encompass a range of income types, including salary, wages, commission, bonuses, overtime, and certain statutory payments such as sick pay and maternity, paternity or adoption pay.
It's essential to calculate these contributions accurately and consistently to make sure you're meeting the legal requirements and providing the correct benefits to your employees.
💡Tide Payroll has a built-in integration with Nest to automatically calculate your pension contributions within your payroll each month. The goal is to streamline the process of managing your employees' pensions, save you time, reduce errors by eliminating manual data entry, and ensuring you’re always compliant with UK employment law.
Wrapping up
Establishing a pension plan for your employees is a meaningful way to invest in their future, and yours. Whilst the process may seem overwhelming at first, understanding your obligations can help you navigate it effectively, resulting in a more financially secure future for your team. Always seek advice from professionals when needed, and use available resources on gov.uk for further help and support.
FAQs on company pension contributions
Do I need to contribute if my employee opts out?
If an employee chooses to opt out of the pension scheme during the one-month opt-out window, you as the employer are not required to make contributions for that employee. However, every three years, you are obligated to re-enrol all eligible employees who have previously opted out, giving them another opportunity to start contributing.
What happens if I don't set up a pension scheme?
Failure to comply with the UK's automatic enrolment duties can lead to significant consequences. The Pensions Regulator can issue a notice and a fine, and persistent failure could lead to court action.
It's important to note that providing a pension scheme is part of fulfilling your responsibilities as an employer and contributes positively to your company's reputation.
Can I change pension providers?
Yes, you have the flexibility to change your company's pension provider if you feel another provider may offer a scheme that's more beneficial for your employees or your business. However, it's essential to ensure that the new scheme meets the criteria for automatic enrolment and that the transition adheres to the rules set by The Pensions Regulator to protect your employees' benefits. It's always recommended to seek professional advice before making such changes.
Image from Unsplash published by andretaissin
