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July 12, 2023

What Is a Workplace Pension in the UK? Types, Setup & Benefits

Workplace pensions help employees save money for their retirement. Learn about the types of workplace pensions in the UK, contributions, setup, and more.

Aine Kavanagh

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Aine Kavanagh

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A workplace pension is a retirement fund an employer sets up for employees. 

As an employer in the UK, you must offer a workplace pension scheme. 

You must also automatically enrol eligible employees into a suitable scheme and contribute to their pension fund. 

Let's learn more about UK workplace pensions. 

What Is a Workplace Pension in the UK?

An employer sets up a workplace pension scheme to help employees save for retirement and later life.

It's also known as "company", "occupational", "work-based", or "works" pension. 

How does it work?

A minimum amount is deducted from the employee's regular wages and contributed to the pension fund. 

Employers must also contribute a minimum amount to their employee's pension pot. 

But here's the thing: 

UK employers must automatically enrol their employees in a pension scheme and make pension contributions only if the employees:

  • Are classed as a 'worker.'

  • Are between 22 and State Pension age.

  • Earn at least £10,000 per year.

  • Usually work in the UK.

What Are the Types of Workplace Pensions in the UK?

Employers can set up two types of workplace pension schemes:  

  • Defined Contribution Pension

  • Defined Benefit Pension 

Here's a quick overview of each pension type: 

1. Defined Contribution Pension Scheme (Money Purchase Scheme) 

  • In a defined contribution pension scheme, the employer and employee contribute a minimum amount to the pension pot.  

  • These contributions are added to the pension fund and invested in shares and stocks. 

  • In some defined contribution schemes, the money is moved to low-risk investments when the employees are closer to retirement age.

  • The amount of money employees receive upon retirement depends on the following questions:

    • How much have they contributed?

    • How long have they contributed?

    • How well have their investments performed?

UK employers can choose three different options to set up a defined contribution scheme: 

  • Individual Trust Pension Scheme: The trustees of a company run this scheme, and it's only available to the individual employer and their workers. For example, stakeholder pension or self invested personal pension (SIPPs). 

  • Group Personal Pension Scheme: A group personal pension scheme is a collection of individual workplace pension plans employers create for their employees.

  • Master Trust Pension Scheme: A master trust pension scheme offers workplace pension schemes to multiple employers who aren’t connected to each other. For example, Nest is a government-based workplace pension master trust.

Nest (National Employment Savings Trust) is an online pension scheme the UK government set up to simplify the auto-enrolment process.  It operates with the approval of the FCA (Financial Conduct Authority), a financial regulatory body that manages the financial services register.

2. Defined Benefit Pension Scheme (Final Salary Scheme

  • In a defined benefit pension scheme, employees contribute a predetermined portion of their payroll to their pension fund, while the employer contributes the rest.

  • The final salary pension scheme has a legal pension age, which is usually the State Pension age when the employees can retire and begin receiving their pension income.

  • It's calculated by multiplying how long your employee has been a member of the scheme with their final salary before retirement, which is then divided by 1/60th or 1/80th of their pensionable income.

Some perks of a final salary scheme include:

  • Death in service: If the employee dies before retirement, their spouse or dependents may be eligible to receive lump sum payments.

  • Pension transfer: Employees can opt for a pension transfer if they move or change jobs by informing their old pensions providers.

  • Pension protection: In cases of bankruptcy, the Pension Protection Fund (PPF) pays compensation to eligible pension scheme members.

How Much Do Employers and Employees Contribute to UK Workplace Pensions?

As of June 2023, the minimum contribution for workplace pension schemes is set at: 

  • 3% minimum contribution for employers

  • 5% minimum contribution for employees 

The total minimum contribution made by the employer and employee should be 8%. 

As an employer, you can also set workplace pension rules to define which parts of your employee's earnings are included in contributions, also known as 'pensionable earnings'. 

Employees must fulfil the minimum contribution limits towards the pension schemes by law. However, the employer can increase their National Insurance Contributions if needed.

How Can You Set Up Workplace Pension Schemes in the UK?

Follow these simple steps to set up a UK workplace pension scheme for your employees. 

Step 1: Determine Your Staging Start Date

This is the first day of work for a new employee, and the day you start the employee auto-enrolment process for the first time. 

You must establish a workplace pension program within six weeks of the staging date. 

If the pension scheme isn’t established within the time frame, The Pensions Regulator (TPR) can take enforcement action.

Step 2: Choose a Pension Scheme

Choose the type of pension scheme you want to offer your employees. 

It could be a defined contribution pension scheme or a defined benefit pension scheme. 

While choosing a pension scheme, ask yourself: 

  • Does the scheme allow you to auto-enrol employees?

  • Is the scheme available to all your eligible employees?

  • Are the costs of the scheme reasonable?

  • Is the scheme compatible with your payroll process?

Step 3: Identify Employees Eligible for the Pension Scheme

Employees eligible to avail of workplace pension schemes fall under three types: 

  • Type 1: Employees in this category must be auto-enrolled in a pension plan. They are aged between 22 and State Pension age and earn more than £192 a week or £833 a month, known as qualifying earnings. 

  • Type 2: These employees earn between £6,240 and £10,000 and are not qualified for auto-enrolment. However, they can still voluntarily enrol in a workplace pension scheme.

  • Type 3: These employees are called entitled workers. They are aged between 16 to 74 years of age and earn less than qualifying earnings, i.e., £6240 per year. Entitled workers are not required to enrol in a pension scheme, and employers are not obligated to pay them the 3% minimum contribution. 

Step 4: Inform Your Staff

Notify your employees whether they will be automatically enrolled in your pension plan. This allows eligible employees to decide whether to invest in the pension scheme or opt out. 

Advise your staff about automatic enrolment and how much they must contribute within six weeks of their staging date.

Step 5: Complete an Online Declaration of Compliance

The final step is completing an online compliance statement. 

To complete this declaration of compliance, The Pensions Regulator will offer you a letter code and PAYE (Pay As You Earn) reference.

You re-declare your compliance with The Pensions Regulator within five months of the third anniversary of your auto-enrolment duties start date. 

Alternatively, you can choose a re-enrolment date. 

For example, if the staging start date of an employee is 1st June 2016, your third anniversary will be 1st June 2019. So your re-declaration deadline with the pension regulator will be five months later, i.e., 31st October 2019.

What Are the Benefits of Workplace Pension Schemes?

A workplace pension scheme in the United Kingdom:

1. Adds to Your Employee's State Pension 

Employees can simultaneously avail of state and workplace pensions if they earn above the National Insurance Contribution (NIC) threshold. 

This threshold is £1,048 per month for employees as of June 2023. 

This way, you can ensure your employees have ample pension savings in their retirement fund to accommodate their cost of living.

2. Gives Your Employees Tax Relief on Their Income 

In some workplace pension schemes, employers may deduct pension payments from their employee's pay before deducting income tax. 

When employees contribute to a personal pension or some other workplace pension scheme, their pension provider can claim back income tax at the current 20% basic tax rate and add it to the employee's pension pot. This is also known as relief at source. 

So if an employee contributes £80, their pension provider will claim back £20, and a total contribution of £100 goes into their pension pot. 

3. Requires Employers to Match Employee Contributions 

If employees enrolled in a workplace pension scheme have good pay and wish to contribute more to their pension pot than the minimum requirement, their employers must do the same. 

Employers usually match up to a maximum proportion, which isn't less than 1% of the employee's salary.

4. Helps Your Employees Maintain a Good Lifestyle in Retirement 

It's hard to predict how much pension saving an employee will need to live comfortably in retirement. 

Some workplace pension schemes, like defined contribution pensions, allow employees and their employers to contribute to their pension pot which is then invested in shares and stocks. 

This added income, along with the tax relief provided by the government, ensures the employees have ample retirement savings. 

Many pension companies and financial advisers provide tools that can assist employees in calculating the amount of contribution required to manage their cost of living post-retirement. 

These financial advice tools will also consider the impact pay growth and inflation can have on their contributions.

2 FAQs on Workplace Pension Scheme

Here are the answers to some commonly asked questions about workplace pensions. 

1. What Is the Difference Between Auto Enrolment and Voluntary Enrolment in Workplace Pension? 

  • Auto-enrolment into a pension scheme is when your employees meet the eligibility criteria for a workplace pension. 

  • This requires employees to be between 22 and the State Pension age and earn more than the National Insurance Contributions threshold. 

  • Employees who don't meet the eligibility criteria for automatic enrolment can still join a workplace pension scheme through voluntary enrollment. 

  • The amount employers and workers contribute to the workplace pension depends on the type of occupational pension scheme the employees are enrolled in. 

  • In automatic enrolment, you and your employee must contribute a portion of your wages to the pension plan.

  • However, if your employee voluntarily joined a workplace pension, as an employer, you must contribute the minimum amount (3%) only if they earn more than:

    • £520 per month.

    • £120 a week.

    • £480 spread over four weeks.

If your employees earn these amounts or less, you don't have to make the minimum contribution.

2. How Can You Claim Tax Relief on Your Workplace Pension Payments?

  • Your employees can get tax relief on their pension contributions in two ways: relief at source or net pay.

  • Employees may be entitled to receive pension tax relief on pension contributions if they meet the following criteria:

  • They pay income tax at a rate higher than the 20% basic tax rate, and their pension provider claims the first 20% for them (relief at source).

  • Their pension plan is not set up to receive automatic pension tax relief.

  • Someone else contributes to their pension.

Manage UK Workplace Pensions Easily with Yonder 

Offering a workplace pension scheme isn't just a legal obligation but a strategic move that can benefit companies. 

It offers your employees financial security during retirement while helping you acquire top talent, boost employee morale and enhance productivity. 

Want to offer workplace pension schemes without the hassle? 

Try Yonder!

Yonder is a digital pension app that simplifies retirement benefits management in the UK.  

We work with Smart Pension, a reputable pension provider in the UK, to help companies set up and manage pensions compliantly — regardless of where your company is based or if you even have a bank account in the UK.  

With Yonder, you can: 

  • Enrol your UK-based employees in a workplace pension scheme in minutes. 

  • Comply with the UK auto-enrolment legislation that requires you and your employees to make a total minimum contribution of 8% to their pension fund. 

  • Integrate your existing HR and payroll tools to reduce administrative work.

  • Postpone auto-enrolments for up to three months. You can even set up automatic postponements to create a standard postponement period for your team. 

  • Manage re-enrolments every three years based on how you submit pension contributions. 

So why not join Yonder to offer your team affordable and scalable pension coverage effortlessly?

Aine Kavanagh

Article written by

Aine Kavanagh

👋🏻 Hi I'm Aine, Head of Customer Success at Yonder. Whether you're a Yonder customer, a Yonder user, or you're just browsing, I hope to help educate and empower those who want to know more about owning their own benefits, and building financial autonomy 📚

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