How FreeAgent’s automatic pension contribution calculation works

This article explains how to automatically calculate your employees’ pension contributions when you're using FreeAgent’s payroll.

When setting up a pension scheme, you’ll initially agree with your pension provider the specific portion of your employees' earnings that will be used to calculate their pension contributions, whether that's all or just part of their pay. You’ll also determine the percentage of these earnings that will be contributed by both the employer and the employee, as well as the type of pension contribution tax relief. If you’re unsure what was agreed, please check with your pension provider.

When you’re creating a payroll profile in FreeAgent for each employee that’ll be included on the payroll, you need to enter whether they’re making monthly pension contributions.

If the employee is making monthly pension contributions, select ‘Yes, making contributions’ for ‘Are they making pension contributions?’

If you’d like FreeAgent to automatically calculate the pension contributions, select ‘Yes’ to ‘Auto calculate pension contributions?’. If you don’t want FreeAgent to automatically calculate the pension contributions, select ‘No’ and enter the information manually.

Please note that if the employee is on paid leave, you’ll need to manually enter the pension contributions.

In order for FreeAgent to accurately calculate your pension contributions, you’ll need to enter the contribution basis, contribution type, employee and employer pension contributions and pensionable pay.

Contribution basis

Next, you’ll need to select whether to use ‘All pay’ or ‘Automatic enrolment thresholds’ as the contribution basis for calculating the pension contribution.

Different pension schemes allow for different amounts of earnings to be used to calculate the percentage of pension contributions, which would be agreed between the employer and the pension provider. For auto-enrolment, employers must as a minimum calculate pension contributions using earnings between the auto-enrolment qualifying earnings bands.

All pay

If you select ‘All pay’ as the contribution basis, contributions are calculated from all of the employee’s selected pensionable pay. For example, if an employee is paid £1000 per month and contributes 5% to their pension using this basis, the deduction is £50 (5% of £1000).

Automatic enrolment thresholds

If you select ‘Automatic enrolment thresholds’ as the contribution basis, contributions are calculated from the employee’s earnings that fall between the lower and upper thresholds for qualifying earnings. For example, if an employee is paid £1000 per month in the 2023/24 tax year and contributes 5% to their pension using this basis, the deduction is £24 (5% of £480 (£1000 - £520)).

Contribution type

Then, you’ll need to choose the contribution type. You can choose either net pay, relief at source or salary sacrifice.

The tax treatment of pension contributions can differ and will be agreed between the employer and pension provider. If you’re unsure which option to select, please ask your pension provider.

Net pay

If you select ‘Net Pay’ as the contribution type, tax is worked out on the amount of the salary less the employee's pension contribution.

Relief at source

If you select ‘Relief at Source’ as the contribution type, tax is worked out on the amount of the gross salary, before the pension contribution is taken off.

Please note that if ‘Relief at Source’ is selected, FreeAgent will automatically adjust the employee contribution by 20% as the pension provider claims 20% tax relief from HMRC and adds it to the pension pot of the employee. For example, if an employee’s pension contribution is 5% and ‘Relief at Source’ is used, FreeAgent would calculate a 4% deduction and the pension provider will reclaim the remaining 1% in accordance with HMRC guidance.

Salary sacrifice

If you select ‘Salary Sacrifice’ as the contribution type, Income Tax and National Insurance is worked out on the salary less the employee’s pension contribution.

Employee and employer pension contributions

Next, enter the percentages that the employee and employer will be contributing towards the employee’s pension each month. The employer pension contributions are calculated by taking a percentage of the employee’s pay based on the contribution basis and contribution type selected. Employer pension contributions don’t affect the amount of tax or National Insurance that the employee pays.

Pensionable pay

Finally, select which types of pay should be included in the employee’s pension calculations. FreeAgent will ignore any types of pay that aren’t selected when calculating the pension contributions. If you’re not sure which types of pay should be included, please ask your pension provider or your accountant.

These selections will be applied to the employee’s payroll profile when starting a new payroll tax year. You can set up default pension contribution settings for any new employees.

Once all the relevant information has been entered, select ‘Create Payroll Profile’ at the bottom of the screen to create the payroll profile for the employee, or ‘Update Payroll Profile’ if you are making changes to an existing employee’s payroll profile.

Paid leave

During periods of paid leave, such as parental leave, an employee’s pay often changes and is typically reduced. The amount the employee contributes is based on their actual pay during this time, but the employer contributions are based on the salary the employee would have received if they were not on leave. Therefore, you'll need to manually enter the pension contributions for employees that are on paid leave to reflect the correct employer contribution. You can find more information on HMRC's website.

Manually entering the pension contributions

If you don’t want FreeAgent to automatically calculate the pension contributions or you want to enter a fixed amount because they’re on paid leave for example, select ‘No’ to ‘Auto calculate pension contributions?’ and enter the contributions in the relevant fields.

Once all the relevant information has been entered, select ‘Create Payroll Profile’ at the bottom of the screen to create the payroll profile for the new employee, or ‘Update Payroll Profile’ if you are making changes to an existing employee’s payroll profile.