The Pensions component allows you to record all information required by the payroll to calculate the pension contributions to be paid into the employees' pension schemes.

To use the pensions functionality, you need to set up your system appropriately by carrying out the steps under Pension Schemes in Customizing for Payroll: United Kingdom. You can set up flat-rate, percentage, or mixed-value pension schemes. If necessary, you can introduce new schemes using bespoken customer schemes as models.

The Pensions component complies with the statutory requirements for processing pensions:

• Company pension schemes

You can set up your own company pension schemes. The employer, and the employees who join these schemes pay a reduced amount of National Insurance.

• Contracting-out certificate

To qualify for reduced NI, you require a contracting-out certificate from the Pensions Schemes Office of the Inland Revenue. The SCON and ECON numbers you receive need to be entered into the system and specified on your end of year returns.

• Contracted-out NICs

The system distinguishes employees for NI purposes according to whether or not they have contracted to pay into a pension scheme which has contracted out of SERPS. An employee who has joined such a scheme also contracts out of SERPS and pays contracted-out NIC. An employee who decides against joining the contracted-out pension scheme, does not contract out of SERPS and therefore pays not contracted-out NIC.

• Tax relief

The system deducts National Insurance on total gross pay. Before tax is calculated, pension contributions are deducted and tax is calculated on the remaining earnings (taxable gross). In this way, tax relief is given on the pension contributions.

• Additional voluntary contributions (AVCs)

An employee can make additional voluntary contributions (AVCs) to the company pension scheme, or free standing additional voluntary contributions (FSAVCs) to a separate individual scheme run by an insurance company, to take advantage of tax incentives. An employee's overall pension contributions when added to any additional voluntary contributions must not exceed 15% of the employee's total remuneration.