A scheme guide to AE contribution requirements

1. The employer must pay contributions into the scheme in respect of the jobholder.

2. The employer's contribution must be at least 3 per cent of the jobholder's qualifying earnings in the relevant pay reference period.

3. Total contributions must at least 8 per cent of the jobholder's qualifying earnings in the relevant pay reference period.

However the 3 per cent employer and 8 per cent total contribution requirement – typically 3 per cent employer, 4 per cent employee and 1 per cent tax relief – only comes into force on October 1 2018.

Before then, transitional provisions for money purchase schemes allow employer contributions to be restricted to 1 per cent (2 per cent total) during a first transitional period ending on September 30 2017, and 2 per cent (5 per cent total) during a second transitional period ending on September 30 2018.

Employers are to be allowed to certify that an occupational money purchase scheme meets the quality requirements or meets an alternative prescribed test – there are also alternative certification tests for personal pension schemes.

Because many schemes base pensionable earnings on basic pay, rather than gross pay, within a specified band, a certification model has been introduced. Employers can certify that an alternative test has been met, using the scheme's definition of pensionable earnings, under any of the following:

Test one

• Employer contribution of at least 4 per cent of pensionable earnings;

• Total contribution of at least 9 per cent of pensionable earnings; and

• Pensionable earnings must be at least basic pay.

Test two

• Employer contribution of at least 3 per cent of pensionable earnings;

• Total contribution of at least 8 per cent of pensionable earnings;

• Pensionable earnings must be at least basic pay; and

• The pensionable earnings of all relevant jobholders are at least 85 per cent of the "earnings" of those jobholders.

Test three

• Employer contribution of at least 3 per cent of earnings; and

• Total contribution of at least 7 per cent of earnings.

There are transitional reductions in the percentage requirements, in line with those for the main quality requirement.

Qualifying earnings has a specific meaning, and is defined by reference to an earnings band: currently between £5,668 and £41,450, the national insurance upper and lower earnings limits, and reviewed annually by government against the general level of earnings.

Earning "qualifying earnings" is one of the tests used to determine whether a worker is also a jobholder.

But it should not be confused with earning "threshold earnings", currently £9,440 – which is also the income tax personal allowance – which determines whether a jobholder must be automatically enrolled.

Both qualifying earnings and threshold earnings include all salary, wages, commissions, bonuses and overtime, as well as statutory sick, maternity, paternity and adoption pay.

Managing AE pay rules

Pay reference periods come in a variety of guises (including lunar months), so in order to track whether or not a worker is also a jobholder, and whether a jobholder is eligible to be automatically enrolled, the appropriate earnings bands need to be determined for each pay reference period in operation within the workforce.

For example, for a worker with a weekly pay reference period, the qualifying earnings band is between £109 and £797, and the threshold earnings trigger is £182.

So employee A, aged 25 with a weekly gross pay of £360 must be automatically enrolled, but employee B, also aged 25, but with a weekly gross pay of £175 does not (although is entitled to opt-in and get an employer contribution).

Existing workers with threshold earnings must be automatically enrolled on their 22 birthday (or their employer's staging date, if later).

This can be postponed for three months on giving the employee notice. Existing workers aged between 22 and the state pension age must be automatically enrolled from the first day of a pay reference period in which their earnings reach the threshold trigger (which again, can be postponed for three months).

This may give employers of those with fluctuating pay very little time to effect auto-enrolment, as they will not be certain that a duty to automatically enrol has arisen until the worker both earns enough to be a jobholder and reaches the threshold earnings trigger in that pay reference period.

In practice, this means employers will need to monitor workers earning less than the appropriate threshold trigger in each pay reference period in order to identify whether and when a duty to automatically enrol arises.

Anne-Marie Winton is a partner at law firm Nabarro