UK Workplace Pension explained

UK Workplace Pension and Auto-Enrolment: What Employers Need to Know

If you are employing someone in the United Kingdom, you are legally required to provide them with a workplace pension. There is no way around it. The Pensions Act 2008 made auto-enrolment compulsory for every UK employer, regardless of size, and that includes foreign companies with just one UK-based employee.

The rules are specific, the contributions are mandatory, and the penalties for non-compliance are steep. But once you understand the system, it is actually quite manageable. Let us break it down.

What is UK workplace pension auto-enrolment?

Auto-enrolment is a legal requirement under the Pensions Act 2008 that obliges every UK employer to automatically enrol eligible employees into a qualifying workplace pension scheme. The employer must make contributions on top of the employee's own contributions, and the government provides tax relief on the employee's portion.

The system was phased in starting with the largest employers in 2012, and by 2018 every employer in the UK was covered. There are no exceptions based on company size. Whether you employ one person or ten thousand, you must comply.

The minimum total contribution is currently 8% of qualifying earnings, with at least 3% coming from the employer. The employee contributes 5%, and tax relief brings the effective cost down to 4% for the employee.

For foreign companies, this is one of the most common areas where compliance falls through the cracks. If you are hiring in the UK, you need to get this right from day one.

Who qualifies for auto-enrolment?

Not every employee is automatically enrolled. The eligibility criteria are set out in the Pensions Act 2008 and are based on three factors:

Age. The employee must be at least 22 years old and under State Pension age (rising from 66 to 67 between 2026 and 2028).

Earnings. The employee must earn more than £10,000 per year (the auto-enrolment threshold for 2024/25).

Working in the UK. The employee must ordinarily work in the United Kingdom under a contract of employment.

If an employee meets all three criteria, you must automatically enrol them into your pension scheme. They do not need to ask, and you cannot encourage them to opt out.

What about employees who do not qualify?

Employees who are aged between 16 and 21, or between State Pension age and 74, and who earn above £6,240 per year have the right to opt into the pension scheme. You must allow this and make employer contributions if they request it.

Employees earning between £6,240 and £10,000 per year must be enrolled into the scheme if they ask to join, but you do not have to auto-enrol them.

Employees earning below £6,240 per year have no right to be enrolled, though they can choose to join a pension scheme voluntarily. In that case, you do not have to make employer contributions.

What are qualifying earnings?

Qualifying earnings is the band of earnings used to calculate pension contributions. For 2024/25, qualifying earnings are the portion of an employee's gross annual earnings between £6,240 and £50,270.

This includes:

• Salary
• Wages
• Commission
• Bonuses
• Overtime
• Statutory sick pay
• Statutory maternity, paternity, adoption, and shared parental pay

It does not include benefits in kind or expenses.

How contributions are calculated

Here is an example. Suppose your employee earns £40,000 per year:

• Qualifying earnings: £40,000 minus £6,240 = £33,760
• Employer contribution (3%): £1,012.80 per year
• Employee contribution (5%): £1,688 per year
• Total annual pension contribution: £2,700.80

That works out to roughly £84.40 per month from the employer and £140.67 per month from the employee.

For a higher earner on £80,000:

• Qualifying earnings: £50,270 minus £6,240 = £44,030 (the upper limit caps this)
• Employer contribution (3%): £1,320.90 per year
• Employee contribution (5%): £2,201.50 per year
• Total annual pension contribution: £3,522.40

Note that earnings above £50,270 are not included in qualifying earnings. This is an important detail that catches some employers off guard.

These are minimums. Some employers choose to contribute more as part of their benefits package. Offering a higher employer contribution can be a powerful recruitment tool, particularly in competitive sectors like technology and financial services.

The employee's 5% contribution benefits from tax relief at their marginal rate. So for a basic-rate taxpayer, the effective cost is 4% (the government adds 1% through relief at source). Higher-rate taxpayers can claim additional relief through their self-assessment tax return.

Which pension scheme should you use?

You need a pension scheme that qualifies for auto-enrolment. There are several options:

NEST (National Employment Savings Trust)

NEST is the government-backed workplace pension scheme designed specifically for auto-enrolment. It was set up by the NEST

Corporation under the Pensions Act 2008 to ensure every employer has access to a qualifying scheme.

Advantages of NEST:

• No minimum contribution or setup fee
• Open to any employer regardless of size
• Designed to handle auto-enrolment requirements
• Low charges (1.8% on each new contribution, plus a 0.3% annual management charge on the fund)

NEST is the default choice for many smaller employers and is widely used by EOR providers managing pensions for international companies.

Master trust schemes

Master trusts like The People's Pension, Smart Pension, and Now: Pensions are multi-employer pension schemes that meet auto-enrolment requirements. They often offer more investment options than NEST and may have competitive charging structures.

Group personal pensions

Larger employers sometimes set up a group personal pension (GPP) with a provider like Scottish Widows, Aviva, or Legal and General. These offer more customisation but require more administration.

Defined benefit schemes

Some employers, particularly in the public sector, offer defined benefit (final salary) schemes. These are increasingly rare in the private sector due to their cost and complexity.

For most foreign companies hiring in the UK through an EOR, the EOR will handle scheme selection as part of their service. They will typically use NEST or a master trust that integrates with their payroll systems.

The re-enrolment cycle catches some employers by surprise. Set a reminder well in advance and make sure your payroll system flags employees who opted out previously.

The Pensions Regulator publishes an enforcement policy and regularly names non-compliant employers. For a foreign company trying to build a reputation in the UK, this is not the kind of publicity you want.

This is one of the most significant benefits of using an EOR for UK employment. Pension compliance is an ongoing obligation, not a one-time setup task. Missing a re-enrolment date or miscalculating contributions can trigger penalties even if everything else is running smoothly.

For a deeper look at how EOR employment works in the UK, see our guide to Employer of Record in the United Kingdom.

How does auto-enrolment interact with payroll?

Pension contributions are calculated and deducted as part of the payroll process. This means your payroll system needs to:

• Assess each employee's eligibility every pay period
• Calculate qualifying earnings correctly
• Apply the correct contribution rates
• Deduct the employee's contribution from gross pay before calculating tax and NI (pension contributions are deducted before tax, which is what provides the tax relief)
• Report pension contributions on the payslip
• Remit contributions to the pension provider within the statutory deadline (usually within a few days of payroll)

For employers running payroll in-house, this means your payroll software must support auto-enrolment. Most UK payroll platforms (Xero, Sage, QuickBooks, BrightPay) include auto-enrolment functionality, but it needs to be configured correctly.

If you are using an EOR, all of this is handled as part of the standard payroll service. For more on how UK payroll works, see our guide to PAYE Explained.

What is the NEST pension scheme?

NEST deserves special attention because it is the scheme most commonly used by smaller employers and EOR providers.

Who runs it? NEST is run by the NEST Corporation, a non-departmental public body established under the Pensions Act 2008. It is backed by the UK government.

How does it work? Employers contribute directly to NEST, and the money is invested in a range of funds chosen by the member (or a default fund if they do not make a choice). Members can track their pension online and make changes to their investment choices.

What are the charges? NEST charges 1.8% on each new contribution and a 0.3% annual management charge on the total pot. These are lower than many commercial pension providers.

Is it any good? NEST is a perfectly adequate pension scheme for auto-enrolment purposes. It is not the most feature-rich option, but it is accessible, well-regulated, and designed for exactly this use case. For most employees auto-enrolled through an EOR, NEST is the scheme they will join.

Can I use a different scheme? Yes, and some EOR providers use alternatives. Ask your EOR which scheme they use and what the charges are. The key requirement is that the scheme meets the qualifying criteria set out in the Pensions Act 2008.

What about pension salary sacrifice?

Some employers offer pension contributions through a salary sacrifice arrangement. Instead of the employee contributing 5% from their gross pay, the employee agrees to reduce their salary by 5%, and the employer pays the full 8% contribution.

The benefit? Both the employer and the employee save on National Insurance. The employee's reduced salary means lower NI contributions, and the employer's NI bill drops too.

However, salary sacrifice arrangements are more complex to administer and require specific legal documentation. They also affect other salary-related benefits (like life insurance or mortgage applications, which may be based on gross salary).

If you are employing through an EOR, ask whether they support salary sacrifice. Not all EOR providers offer this option, but it can save meaningful amounts for both parties. For more on NI and how it works, see our guide to National Insurance in the UK.