What Is a Workplace Pension?
A workplace pension is a pension your employer sets up and pays into on your behalf. Money comes out of your wages, your employer adds money of its own, and the government adds tax relief. The three amounts go into a pot in your name, invested until you take it, normally from age 55 rising to 57 in April 2028.
The important word is workplace. The employer chooses the scheme, handles the paperwork and pays the contributions across through payroll. You do not apply, you do not shop around, and in most cases you do not even sign anything. You are put into it automatically and left to opt out if you do not want it. That single design decision, made in the Pensions Act 2008 and rolled out from 2012, is the reason 90 percent of eligible employees in Britain now save into a workplace pension, against well under half before it started.
For most people the workplace pension is a defined contribution scheme. What you get at the end depends on what went in and how the investments performed. Defined benefit schemes, which promise a proportion of your salary for life, still exist in the public sector and in a shrinking number of older private employers, but almost nobody is being newly enrolled into one.
Auto Enrolment: Who Has to Be Put In
Auto enrolment is the legal duty sitting behind the workplace pension. Every employer in the UK with at least one member of staff has it. There is no exemption for being small, new, seasonal or struggling.
The rules sort your workforce into three categories, and the category decides what you owe them.
| Category | Age | Annual earnings | What the employer must do |
|---|---|---|---|
| Eligible jobholder | 22 to State Pension age | Over £10,000 | Enrol automatically and pay contributions |
| Non-eligible jobholder | 16 to 74 | £6,240 to £10,000 | Nothing, unless they ask to opt in. Then contributions are due |
| Non-eligible jobholder | 16 to 21, or SPA to 74 | Over £10,000 | Nothing, unless they ask to opt in. Then contributions are due |
| Entitled worker | 16 to 74 | Under £6,240 | Give access to a scheme if asked. No employer contribution required |
Two things trip employers up here. The first is that the duty applies to workers, not just employees, so most casual and zero hours staff are in scope even though their earnings bounce around. The second is that assessment is not a one off. Every payroll run, every worker has to be tested again against the thresholds for that pay period. A part timer who picks up overtime in December can become an eligible jobholder for December alone, and the enrolment duty bites that month.
The 2026/27 Auto Enrolment Thresholds
The Department for Work and Pensions confirmed in December 2025 that all three thresholds stay where they are for 2026/27.
| Threshold | Annual | Monthly | Weekly |
|---|---|---|---|
| Earnings trigger for automatic enrolment | £10,000 | £833 | £192 |
| Lower limit of qualifying earnings | £6,240 | £520 | £120 |
| Upper limit of qualifying earnings | £50,270 | £4,189 | £967 |
The trigger and the qualifying earnings band do different jobs, and mixing them up is the single most common payroll error we see in this area.
The trigger is a gate. It looks at gross earnings in the pay period and asks whether this person must be enrolled at all. The qualifying earnings band is a measuring stick. Once someone is in, it decides how much of their pay the percentages are applied to.
The Trigger Has Not Moved Since 2014, and That Is the Real Story
The earnings trigger has been £10,000 since the 2014/15 tax year. Twelve years. It has never been uprated, and each year the DWP publishes a review explaining why it is leaving it alone.
Look at what that means in hours rather than pounds.
When the trigger was set at £10,000, the adult minimum wage was £6.50 an hour. Reaching £10,000 took roughly 1,540 hours, which is about 30 hours a week across the year. From April 2026 the National Living Wage is £12.71. Reaching the same £10,000 now takes around 790 hours, or about 15 hours a week.
The threshold has quietly halved in real terms. A minimum wage worker doing two shifts a week is now auto enrolled where the same person twelve years ago would not have been. Nobody legislated for that. It happened because a cash figure sat still while wages did not.
The same freeze runs through the qualifying earnings band, and there it works on the money rather than the headcount. Contributions are charged on the slice of pay between £6,240 and £50,270. Because the £6,240 floor has not moved either, that slice grows every time anyone gets a pay rise, so the effective contribution rate on total pay creeps upward year after year without any announcement. It is the pension equivalent of fiscal drag, and it is the reason total workplace pension saving reached £166.1 billion in 2025.
How Much Actually Goes In
The legal minimum is 8 percent of qualifying earnings, of which the employer must fund at least 3 percent. In practice that means 3 percent employer and 5 percent employee, and the employee's 5 percent includes the tax relief the government adds.
The trap is the phrase qualifying earnings. Eight percent is not eight percent of salary. It is eight percent of the band between £6,240 and £50,270. Everything below the floor and above the ceiling is ignored.
Here is what that does to real salaries in 2026/27.
| Gross salary | Qualifying earnings | Employer 3% | Employee 5% | Total in | Effective rate on full pay |
|---|---|---|---|---|---|
| £10,500 | £4,260 | £127.80 | £213.00 | £340.80 | 3.2% |
| £15,000 | £8,760 | £262.80 | £438.00 | £700.80 | 4.7% |
| £25,000 | £18,760 | £562.80 | £938.00 | £1,500.80 | 6.0% |
| £30,000 | £23,760 | £712.80 | £1,188.00 | £1,900.80 | 6.3% |
| £45,000 | £38,760 | £1,162.80 | £1,938.00 | £3,100.80 | 6.9% |
| £60,000 | £44,030 | £1,320.90 | £2,201.50 | £3,522.40 | 5.9% |
Two patterns fall out of that table, and both matter more than the headline 8 percent.
Low earners get least, proportionally. Someone on £10,500 has £340 a year going into a pension. That is the correct legal answer and it is a poor retirement outcome. The person is technically a pension saver and shows up in the participation statistics, but the pot will not amount to much.
High earners also lose out, for the opposite reason. Above £50,270 the band stops. On £60,000 the effective rate has already fallen back to 5.9 percent, and it keeps falling as pay rises. Anyone earning meaningfully above the upper limit and relying on the statutory minimum is under saving, and the further above it they go, the worse it gets.
Certification: The Alternative Nobody Explains
Working out qualifying earnings for every worker every pay run is fiddly. So the rules let employers certify their scheme against one of three alternative sets instead, using a simpler definition of pensionable pay.
| Set | Contribution basis | Total minimum | Employer minimum |
|---|---|---|---|
| Set 1 | Basic pay | 9% | 4% |
| Set 2 | Basic pay, where basic pay is at least 85% of total pay across the workforce | 8% | 3% |
| Set 3 | All earnings | 7% | 3% |
The rates look higher than 8 percent, and people assume certification is more expensive. Often it is not, because these percentages apply to a definition of pay that has no £6,240 deduction. Set 3 at 7 percent of all earnings on a £30,000 salary is £2,100, against £1,900 on the qualifying earnings basis. Set 1 at 9 percent of basic pay on the same salary, assuming no bonus or overtime, is £2,700.
Whether certification saves money depends entirely on the shape of your payroll. If a large slice of your wage bill is overtime, commission or bonus, Set 1 on basic pay only can come out well below the qualifying earnings answer. If everyone is on flat salary with no variable pay, it usually costs more. Certificates last up to 18 months and the 85 percent test for Set 2 has to be evidenced from the previous twelve months of earnings data.
Our view is that certification is worth modelling properly if you have more than about twenty staff and a lot of variable pay, and is rarely worth the administration below that.
How Tax Relief Works, and the One Thing to Check on Your Payslip
There are two ways an employee contribution gets its tax relief, and which one your scheme uses changes what lands in your pot.
Relief at source. The contribution comes out of pay after tax. The provider then claims 20 percent basic rate relief from HMRC and adds it to the pot. If you pay tax at 40 or 45 percent, the extra relief is not automatic. You claim it through your Self Assessment tax return or by asking HMRC to adjust your tax code. A very large number of higher rate taxpayers never claim it. This is the method NEST and most master trusts use.
Net pay arrangement. The contribution comes out of pay before tax is calculated. Relief is given immediately at your marginal rate through payroll, so a higher rate taxpayer gets the full 40 percent with nothing to reclaim.
For most people net pay is the better arrangement because it removes the need to chase anything. But it has a well known failure at the bottom. If you earn below the personal allowance you pay no income tax, so a net pay scheme gives you no relief at all, while the same person in a relief at source scheme gets a 20 percent top up on money they never paid tax on in the first place. Two workers, identical pay, identical contribution, different pots, purely because of which scheme their employer picked.
HMRC now makes top up payments to fix this, covering low earners in net pay schemes from the 2024/25 tax year onward. The payments arrive after the end of the tax year and have to be claimed by people who mostly do not know they exist. If you employ staff below the personal allowance in a net pay scheme, telling them about it costs you nothing and is the sort of thing employees remember.
To find out which one you are in, look at your payslip. If the pension deduction appears before the tax calculation and your taxable pay is lower than your gross pay, it is net pay. If it comes off after tax, it is relief at source.
Salary Sacrifice, and Why Employers Are Suddenly Interested
A third route exists. Under salary sacrifice the employee gives up part of their contractual salary and the employer pays the whole contribution instead. The pension gets the same money, but because the salary was never paid, neither side pays National Insurance on it.
The employer saving is 15 percent of the sacrificed amount, since April 2025. The employee saving is 8 percent within the main band or 2 percent above it. On a £5,000 sacrifice that is £750 to the employer and up to £400 to the employee, every year, for a change that costs nothing to run once it is set up.
Two things have made this urgent rather than merely sensible. Employer National Insurance rose from 13.8 to 15 percent in April 2025 and the secondary threshold dropped to £5,000, so the saving per pound sacrificed is bigger than it has ever been. And at the Autumn Budget 2025 the government announced that from 6 April 2029 only the first £2,000 of salary sacrificed pension contributions each year will escape National Insurance. Above that, both employer and employee NIC will apply.
That gives a three year window in which the arithmetic is unusually favourable, followed by a hard cap. Employers who have been meaning to move to salary exchange should stop meaning to. Employers already running it should be modelling the 2029 position now, because for a workforce sacrificing well above £2,000 a head the cost lands all at once.
Opting Out, Opting In and the Three Year Reset
An enrolled worker can opt out within one month of being enrolled and get every penny of their contributions refunded, as though it never happened. Miss that window and they can still stop contributing, but the money already in stays there until they are old enough to take it.
The opt out notice has to come from the pension provider, not the employer. This is deliberate. Employers are barred from inducing anyone to opt out, from asking about pension intentions during recruitment, and from making opting out easy or opting in awkward. The Pensions Regulator treats inducement seriously and it is one of the areas where it will name employers publicly.
Then there is re-enrolment, which is the duty most small employers forget entirely. Every three years you have to put everyone who opted out back in, if they still qualify. You choose a re-enrolment date within a six month window either side of the third anniversary, you assess your staff on that date, and anyone who is an eligible jobholder goes back into the scheme whether they want to be there or not. They can opt out again, and many do, but you have to do it. Postponement, which lets you delay assessment by up to three months for new starters, cannot be used at re-enrolment.
After re-enrolment you must submit a re-declaration of compliance to the Pensions Regulator within five months of the third anniversary. This is a separate obligation from the re-enrolment itself, and failing to file it is one of the most common reasons employers receive a penalty.
What Employers Are Legally On the Hook For
The full duty list, in the order it usually bites:
- Assess every worker on the duties start date, then again every pay reference period
- Enrol eligible jobholders into a qualifying scheme, with no waiting beyond a three month postponement
- Write to every member of staff, including those not being enrolled, explaining their rights
- Deduct and pay across contributions to deadline, normally the 22nd of the following month
- Submit a declaration of compliance within five months of the duties start date
- Keep records for six years, and opt out notices for four
- Re-enrol and re-declare every three years
- Never induce anyone to leave
The enforcement ladder starts with an informal nudge and ends somewhere unpleasant. A compliance notice sets a deadline to put things right. Ignore it and a fixed penalty of £400 follows, which is set in law and cannot be negotiated down. Ignore that and an escalating penalty notice starts running at between £50 and £10,000 a day depending on headcount. The Regulator can also issue an unpaid contributions notice requiring the employer to make good the missed contributions including the employee's share, with interest. That last one is the expensive part. An employer who never enrolled anyone for three years does not just owe its own 3 percent. It can be made to fund the workers' 5 percent as well.
The Limits at the Other End
Auto enrolment sets a floor. Separately, tax relief has a ceiling, and it catches more people than it used to.
The annual allowance for 2026/27 is £60,000, covering everything paid in from all sources including employer contributions and tax relief. Unused allowance can be carried forward from the previous three tax years, provided you were a member of a registered scheme in those years.
The tapered annual allowance cuts it for high earners. If threshold income exceeds £200,000 and adjusted income exceeds £260,000, the allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000. Both tests have to be failed, which is why the threshold income test is worth understanding. Employer contributions count towards adjusted income but not threshold income, so salary sacrifice can keep someone below the £200,000 line and out of the taper altogether.
The money purchase annual allowance drops the limit to £10,000 for anyone who has flexibly accessed a defined contribution pension, meaning taken taxable income beyond the 25 percent tax free lump sum. Carry forward is not available once it applies. Anyone who dipped into a pension during the pandemic and later went back to work should check this before making large contributions.
What Is Coming
Three changes are already on the books and worth planning around.
Pensions and inheritance tax, April 2027. From 6 April 2027 most unused pension funds and death benefits fall into the estate for inheritance tax. Since the 2015 pension freedoms they have generally sat outside it, which turned pensions into the most efficient asset to leave untouched and pass on. Death in service benefits, charity lump sums and anything passing to a spouse or civil partner keep their exemption. For everyone else the planning logic of the last decade reverses, and the question of which pot to spend first in retirement needs revisiting.
Salary sacrifice cap, April 2029. Covered above. Three years of notice, which is unusually generous, and no reason to wait until 2028 to look at it.
Age 18 and the first pound. The Pensions (Extension of Automatic Enrolment) Act 2023 gives the government power to drop the enrolment age from 22 to 18 and to remove the £6,240 lower limit so contributions are charged from the first pound. Both powers received Royal Assent in September 2023. Neither has been switched on, and there is still no implementation date.
That second one is the big one for employers, and it is being underestimated because it has been pending for so long. Removing the lower limit adds £6,240 of qualifying earnings to every enrolled worker. At 3 percent, that is roughly £187 a year per head of extra employer cost, on top of whatever you already pay, with no revenue to fund it. For a 50 person payroll that is around £9,400 a year appearing overnight. It will be consulted on before it happens, but the direction of travel has been clear since the 2017 review and the money should be in your medium term forecasts.
Our View
Auto enrolment did what it was designed to do. Getting participation among eligible employees from under half to 90 percent by changing the default rather than the incentives is one of the most successful pieces of behavioural policy this country has run. We would not argue with any of it.
What it did not do is make anyone's retirement adequate. The 8 percent minimum was chosen in 2012 as the highest number that could be introduced without provoking mass opt outs, not as an estimate of what people need. Most analysis puts the requirement closer to 12 to 15 percent for a median earner starting in their twenties, and higher for anyone starting later. The gap between the legal minimum and the useful minimum has never been closed, and every year that the thresholds stay frozen, the minimum quietly does more of the work while looking unchanged.
The part that bothers us most is not the headline rate though. It is that the system has a blind spot exactly where it can least afford one. Auto enrolment tests earnings per job, not per person. Someone holding two part time jobs at £8,000 each earns £16,000 and is auto enrolled in neither, because neither employer sees £10,000. Multiple job holding has risen steadily and falls disproportionately on lower paid women. Those workers can opt in and get an employer contribution, but opting in requires knowing the right exists, and the whole premise of auto enrolment is that people do not act on things they have to know about.
There is a second blind spot that gets less attention and should worry small employers more directly. Across the whole eligible workforce participation is 90 percent, but among eligible employees at private sector micro employers with fewer than five staff it is around 55 percent. That is not a difference in appetite. Almost nobody at a four person firm has decided they dislike pensions more than their counterpart at a four hundred person firm. It is a difference in administration. Small employers are where the enrolment letters do not get sent, the pay period assessments do not happen and the re-enrolment date passes unnoticed, because there is no payroll department and the person doing it is also doing everything else. If the Regulator ever decides to look systematically at the bottom of the market rather than reacting to complaints, that 35 point gap is where it will look.
For employers, our practical advice is duller than any of that. Assess every pay period rather than once a year. Diarise the re-enrolment date the day you complete your first declaration, because three years is exactly long enough to forget. Know which tax relief method your scheme uses and tell your low paid staff if it is net pay. And if you have not looked at salary sacrifice, look at it in the next twelve months rather than in 2028, because the saving is at its historic peak right now and there is a published date on which it stops.
How IAK Can Help
Auto enrolment is a payroll problem that looks like a pensions problem, which is why it tends to be handled by whoever runs the payroll and reviewed by nobody.
Our payroll service assesses your workforce every pay period against the current thresholds, handles enrolment, opt outs and the statutory communications, files your declaration and re-declaration of compliance on time, and keeps the records the Regulator asks for if it ever comes looking. We diarise re-enrolment dates three years ahead so the duty does not arrive unannounced.
Beyond compliance, we model the things that actually change the numbers. Whether certification would cost you less than qualifying earnings given your mix of basic and variable pay. What a move to salary exchange saves you and your staff, and what the 2029 cap does to that saving. Where pension contributions sit alongside salary and dividends for directors' remuneration, which for most owner managers is the single largest tax planning decision of the year and is best made in March, not in January afterwards.
If you have taken on your first member of staff, or you have a nagging feeling that the pension side of your payroll has been running on autopilot since it was set up, contact us for a free consultation. You may also find our guides to PAYE, salary sacrifice, Employment Allowance, National Insurance and what an accountant does useful, along with our salary calculator.
Sources
- Automatic Enrolment: earnings trigger and qualifying earnings bands for 2026/27, DWP written statement HCWS1206, confirming the £10,000 trigger and the £6,240 to £50,270 band are all maintained at 2025/26 levels.
- Automatic enrolment earnings thresholds, The Pensions Regulator, on the pay reference period equivalents and the worker categories.
- Automatic enrolment: guidance on certifying money purchase pension schemes, GOV.UK, on Sets 1, 2 and 3, the 85 percent test and the 18 month certificate period.
- Workplace pension participation and savings trends statistics, DWP, on 90 percent participation among eligible employees, total saving of £166.1 billion in 2025, the split between employer contributions, employee contributions and tax relief, and the 55 percent participation rate at private sector micro employers.
- Relief relating to net pay arrangements, GOV.UK, on HMRC top up payments for low earners in net pay schemes from the 2024/25 tax year.
- Budget: NIC saving on salary sacrifice pension contributions capped, ICAEW, on the £2,000 annual cap taking effect from 6 April 2029.
- Inheritance tax on pension death benefits from April 2027, Royal London technical central, on unused funds entering the estate from 6 April 2027 and the surviving spouse and death in service exemptions.
- Pensions (Extension of Automatic Enrolment) Act 2023, legislation.gov.uk, on the powers to lower the age to 18 and remove the lower earnings limit, and the consultation required before regulations are made.
- Tax on your private pension contributions, GOV.UK, on the £60,000 annual allowance, the £10,000 money purchase annual allowance and the taper at £200,000 threshold income and £260,000 adjusted income.
- National Minimum Wage and National Living Wage rates, GOV.UK, for the £12.71 National Living Wage from April 2026 used in the hours comparison.