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Contents
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Background page 3 1.1 Preset choices to help you meet your duties 3
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Earnings bases and contribution levels page 5 2.1 Earnings bases 2.2 Contribution levels 5 6
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Qualifying earnings page 8 3.1 Minimum contribution levels for qualifying earnings 9
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Certification page 10 4.1 Minimum contribution levels for tier 1 4.2 Minimum contribution levels for tier 2 4.3 Minimum contribution levels for tier 3 11 12 13
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Custom earnings page 14 How tax relief works at NEST page 15 6.1 How do I know if a worker is eligible for tax relief? 6.2 What if the worker isnt eligible for tax relief? 15 16
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NESTs annual contribution limit page 17 Late payments page 18 Glossary page 19 About this version page 20
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01 Background
When you enrol your workers into NEST youll need to assign them to a group. As part of setting up a group or groups of workers, youll need to decide how much you and your workers will be contributing on a regular basis. To do this there are two settings youll need to choose for each group: earnings basis contribution level. Youll need to set up a different group for every combination of earnings basis and contribution level you decide to use. Groups are collections of workers who share the same: contribution levels and earnings basis frequency of contributions earnings periods payment due dates. Weve created this guide to help you understand what the different earnings bases are and how their minimum contributions vary. Youll find case studies showing how different contribution levels and earnings bases might work for workers in your organisation. Well also tell you how you can work out tax relief on your workers contributions if theyre eligible. As you might not be familiar with some of the terms we use, weve included a glossary at the back of this guide to help you understand them. When youre setting up your groups youll also need to add your payment frequency and pay dates. Our website provides clear instructions on how to set up a group. Just follow the onscreen steps or see our separate guide How to set up NEST.
Salary sacrifice
If you have a salary sacrifice agreement with your worker, you need to ensure youve set the correct levels of contributions for each worker in the group. These contribution levels need to be based on post-sacrifice pay. The contributions need to be set up as All employer contributions.
Minimum contributions
(as a percentage of a workers qualifying earnings) Minimum contribution: 2 per cent. The employer must pay at least 1 per cent of this. Minimum contribution: 5 per cent The employer must pay at least 2 per cent of this. Minimum contribution: 8 per cent The employer must pay at least 3 per cent of this.
You may need to increase the contributions youre paying to keep in line with the increasing minimum levels. To make this easy, NEST offers a number of preset options.
Basic-phased If you pick the basic-phased setting well automatically set contribution levels to the minimum levels required that year, based on the earnings you provide when you send us your contribution data. Basic-quick start If you pick the basic-quick start setting well automatically set contribution levels to the minimum levels required in October 2018, when the phasing period ends. For example, if youre using qualifying earnings as your earnings basis the minimum contribution will be 8 per cent, of which you as the employer must pay at least 3 per cent. Custom If you pick the custom setting you have the flexibility to set your own contribution levels. However, the amount you pay must be at least equal to the minimum contribution levels as set out by law under the new employer duties.
03 Qualifying earnings
If you choose qualifying earnings as your earnings basis youll be contributing a percentage of the workers gross annual earnings that fall between 5,668 and 41,450. The first 5,668 of their earnings isnt included in the calculation. For example, if a worker earns 20,000 their qualifying earnings would be 14,332.
Workers annual earnings
5,000 20,000 50,000
This means that qualifying earnings cant be more than 35,782 (41,450 minus 5,668) for the 2013/14 tax year. These are annual figures. Because you pay contributions every pay period, youll need to work out qualifying earnings for each pay period in turn. The table below shows the lower and upper levels of qualifying earnings relating to a workers pay period.
Pay period
Weekly Fortnightly Four-weekly Monthly
Entitled workers
These workers dont have any earnings within the qualifying earnings band for the pay period. This means their qualifying earnings for the pay period will be zero. If youve enrolled any of these workers youll still need to tell us their qualifying earnings for each pay period, even if this figure is 0. To do this, youll need to select a reason for partial or non-payment of contributions. Select Member has insufficient earnings for each pay reference period while the worker remains in your employment.
Case study
A worker earns 1,000 in May 2013. Youll need to work out contributions based on their qualifying earnings. The qualifying earnings will be 1,000 minus 473 as the first 473 is outside the band. This comes to 527 which is the earnings in the band. The minimum contribution is calculated as a percentage of the qualifying earnings of 527. Up to October 2017, the minimum contribution is 2 per cent of 527. You pay half this amount - 1 per cent though you could pay more. The remainder of this 2 per cent will come from the workers contributions. In this example weve assumed theyre eligible for tax relief. The minimum contribution is 2 per cent of 527 = 10.54. Your employer contribution is 1 per cent of 527 which is 5.27. The workers contribution is 1 per cent of 527 which is split into: - 0.8 per cent from their pay, which is 4.22 - 0.2 per cent tax relief of 1.05. The total to send to NEST will be 5.27 + 4.22 = 9.49. Well then ask the government to send us the remaining 0.2 per cent tax relief of 1.05 which well add to the workers retirement pot when we receive it. You can read how tax relief works at NEST in section.
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04 Certification
Using certification as an earnings basis means you can choose a definition of pensionable earnings in line with the tiered approach. You can decide if you want to include bonuses, overtime, performance-related pay and other earnings related to the workers employment with you. There are three different types, or tiers, of certification bases to choose from. All of them start from the first pound of earnings. For tier 1, pensionable earnings must be equal to or more than the workers basic pay. For tier 2, total pensionable earnings of all workers must be at least 85 per cent of their total earnings. The pensionable earnings must be equal to or more than the workers basic pay. Tier 3 includes all earnings as pensionable earnings, which means you need to include wages, commission, overtime, bonuses, performance-related pay and any other earnings the jobholder has been paid by you.
Maintaining a certificate
If youre using certification youll need to complete a certificate at least every 18 months. If theres a significant change to any of the information in the certificate youll have to fill out a new one. Examples of significant changes could be: big changes to your organisation, such as mergers and acquisitions changes to the contribution rate changes to your pay and reward structure. Its your responsibility to complete and maintain your certificate. You can find a template of the certificate you need to fill out in Annex E of the Money purchase schemes guidance (PDF) from the Department for Work and Pensions. On the certificate youll also need to declare what type of scheme NEST is. NEST is an occupational money purchase scheme. As with many other records of your workers, its part of your employer duties to keep a copy of the certificate for six years.
04 Certification
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Minimum contributions
(as a percentage of a workers qualifying earnings) Minimum contribution: 3 per cent Of this, the employer must pay at least 2 per cent Minimum contribution: 6 per cent Of this, the employer must pay at least 3 per cent. Minimum contribution: 9 per cent Of this, the employer must pay at least 4 per cent
Case study 1
A workers basic salary is 1,000 in March 2013. Youve put the worker in a group that uses tier 1 certification as its earnings basis. This means youve decided to use just basic salary for the workers pensionable earnings. The minimum contribution is calculated as a set percentage of the 1,000. Up to October 2017, the minimum contribution is 3 per cent of 1,000. Of this, you as the employer must pay at least 2 per cent. The other 1 per cent will be made up in full or in part by the workers contribution. In this example the worker is also eligible for tax relief. The minimum contribution for this period is 3 per cent of 1,000 = 30. Your employer contributions are 2 per cent of 1,000, which is 20. The workers contribution is 1 per cent of 1,000, which is split into: - 0.8 per cent from the workers pay, which is 8 - 0.2 per cent tax relief of 2. The total to send to NEST will be 20 + 8 = 28. Well then ask the government to send us the remaining 0.2 per cent tax relief of 2, which well add to the workers retirement pot when we receive it. If the worker isnt entitled to tax relief youll also need to deduct an additional 2 from the workers pay and add this to the amount you send NEST. You can read how tax relief works at NEST in section.
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Minimum contributions
(as a percentage of a workers pensionable earnings) Minimum contribution: 2 per cent Of this, the employer must pay at least 1 per cent Minimum contribution: 5 per cent Of this, the employer must pay at least 2 per cent. Minimum contribution: 8 per cent Of this, the employer must pay at least 3 per cent
Case study 2
A workers basic salary is 1,000 in March 2013. Because the workers basic salary is always at least 85 per cent of their total pay, youve decided to put the worker in a group that uses tier 2 certification as its earnings basis. Minimum contributions are then calculated as a set percentage of 1,000. This means that the calculation is easier than if youd chosen to use qualifying earnings. Up to October 2017, the minimum contribution is 2 per cent of 1,000, of which you as the employer pay 1 per cent. The other 1 per cent will be made up in full or in part by the workers contribution. In this example the worker is also eligible for tax relief. The minimum contribution for this period is 2 per cent of 1,000 = 20. Your employer contribution is 1 per cent of 1,000, which is 10. The workers contribution is 1 per cent of 1,000, which is split into: - 0.8 per cent from the workers pay, which is 8 - 0.2 per cent tax relief of 2. The total to send to NEST will be 10 + 8= 18. Well then ask the government to send us the remaining 0.2 per cent tax relief of 2, which well add to the workers retirement pot when we receive it. If the worker isnt entitled to tax relief youll also need to deduct an additional 2 from their pay and add this to the amount you send NEST. You can read how tax relief works at NEST in section 6.
04 Certification
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Minimum contributions
(as a percentage of a workers total earnings) Minimum contribution: 2 per cent Of this, the employer must pay at least 1 per cent Minimum contribution: 5 per cent Of this, the employer must pay at least 2 per cent. Minimum contribution: 7 per cent Of this, the employer must pay at least 3 per cent
Case study 3
A workers basic salary is 1,000 in March 2013 but they also earn overtime and bonuses of 500 that month. So their total pay is 1,500. Youve put the worker in a group that uses tier 3 certification as its earnings basis. This means that the minimum contribution is calculated on the full 1,500. Up to October 2017, the minimum contribution is 2 per cent of 1,500, of which you as the employer pay 1 per cent. The other 1 per cent will be made up in full or in part by the workers contribution. In this example the worker is also eligible for tax relief. The minimum contribution for this period is 2 per cent of 1,500 = 30. Your employer contribution is 1 per cent of 1,500, which is 15. The workers contribution is 1 per cent of 1,500, which is split into: - 0.8 per cent from the workers pay, which is 12 - 0.2 per cent tax relief of 3. The total to send to NEST will be 15 + 12 = 27. Well then ask the government to send us the remaining 0.2 per cent tax relief of 3, which well add to the workers retirement pot when we receive it. If the worker isnt entitled to tax relief youll also need to deduct an additional 3 from the workers pay and add this to the amount you send NEST. You can read how tax relief works at NEST in section 6.
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05 Custom earnings
Using a custom earnings basis allows you to calculate your contributions based on any other method of pensionable earnings thats appropriate for you. Youll need to make sure that your contributions are at least as much as the legal minimums based on qualifying earnings. Rather than use qualifying earnings or the alternative earnings bases already discussed, you may decide you want complete flexibility over your earnings bases and contribution levels. NEST lets you do this. By choosing the custom option you can set your earnings basis and contribution levels to whatever you want. Its up to you to ensure that the amounts you pay are at least as much as the minimum contribution levels set out by the new employer duties. This is a legal requirement.
Case study
A workers basic salary is 1,000 in March for the 2012/13 tax year and they earn no overtime or bonuses in the month. So their total pay in March 2013 is 1,000. Youve put them in a group that uses a custom earnings basis, paying contributions for every pound above 250 for a calendar month. Youve also set the contribution level to custom and chosen 2 per cent employer and 2 per cent member contributions. Qualifying earnings will be 1,000. This is 1,000 minus 250 - as the first 750 is outside the qualifying earnings band. The total contributions for March will be 4 per cent of 750 = 30. Employer contribution are 2 per cent of 750 = 15. Member contributions are 2 per cent of 750, which is split into: - 1.6 per cent from the workers pay, which is 12 - 0.4 per cent tax relief of 3. The total to send to NEST will be 15 + 12= 27 Well then ask the government to send us the remaining 0.4 per cent tax relief of 3, which well add to the members retirement pot when we receive it. If the member isnt entitled to tax relief, youll also need to deduct an additional 3 from your workers pay and add this to the amount you send NEST. Both your overall contribution and your employer contribution are well above what you need to pay as the minimum, so you know youll be meeting your duties.
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You can get more information on qualifying for tax relief by visiting hmrc.gov.uk. Its your responsibility to check with them if youre unsure about a workers eligibility for tax relief. You agree to this when you accept NESTs Employer Terms and Conditions.
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08 Late payments
Its part of your employer duties to send contributions on time. Its against the law to hold on to worker contributions past the payment due date, except where the worker is still in their opt-out period. The latest date we should receive contributions deducted from a workers earnings is the 22nd of the following month after the contribution is taken, unless you select an earlier payment due date when setting up the group. If contributions arent paid on time as set out in the contribution schedule you sent to NEST, it could mean we have to tell The Pensions Regulator. A payment due date means the date the payment must have cleared in NESTs account, so youll have to send the payment earlier than the date selected to make sure we receive it on time. If we receive the contribution later than this date well regard it as late. The timings weve set out below are only to give you a rough idea of how long payment will take using the different methods available. The exact timings will vary depending on the bank you use and the time of day you make the payment. Please speak to your bank for more information. If youve chosen to pay by Direct Debit you should set up the mandate at least 11 working days before its due to make sure the payment reaches us on time. Youll need to allow four working days for subsequent payments. Once its successfully set up, the advantages of Direct Debit are: - less risk of errors and late payments - you dont have to do anything apart from provide us with your completed contribution schedule. If youve chosen to pay by direct credit then youll need to send the payment at least six working days before its due, to make sure it reaches us on time. If youve chosen to pay by debit card then youll need to send the payment at least four working days before its due to make sure it reaches us on time. Payments for members within their opt-out period may be paid after the payment due date, but no later than the date set out in the Occupational and Personal Pension Scheme (Automatic Enrolment) Regulations 2010.
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09 Glossary
Basic pay this is a workers pay from the first pound. It excludes overtime, bonuses and commission. Its only their basic salary. Certification a way for an employer to set an alternative earnings basis to calculate minimum contributions if they dont want to use qualifying earnings. Its been designed for employers who want to use basic pay to calculate their contributions. Qualifying earnings this is the band of gross annual earnings on which contributions are calculated. For the tax year 2013/14 this means earnings between 5,668 and 41,450. These figures apply to the 2013/14 tax year and will be reviewed every year by the government. Pensionable earnings earnings on which pension contributions are paid. They must be at least basic pay for the purpose of certification, from the first pound upwards. Its up to the employer to decide how they want to determine pensionable earnings beyond this. For example, pensionable earnings could include bonuses, overtime, commission or location allowances or a combination of these, in full or in part, in addition to a workers basic pay. Total earnings the total sum of any of the following descriptions that are payable to the worker in relation to their job: salary, wages, commission, bonuses and overtime statutory sick pay under Part 11 of the Social Security Contributions and Benefits Act 1992 (c. 4) statutory maternity pay under Part 12 of that act ordinary statutory paternity pay or additional statutory paternity pay under Part 12ZA of that act statutory adoption pay under Part 12ZB of that act.
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NEST Nene Hall Lynch Wood Business Park Peterborough PE2 6FY Contact us Call: 0300 020 0090 Email: enquiries@nestpensions.org.uk