Written by Ray Coman
With wide coverage in the media, many people will now have heard the term auto-enrolment. Until now it has affected only larger companies however, it is now becoming a legal requirement for businesses of all sizes. In this guide we cover frequently asked questions.
The automatic enrolment of an employee into a workplace pension will become a consideration for employers of all sizes.
Which businesses are subject to the rules?
The requirement applies to any employer with employees who ordinarily work in the UK. It applies to temporary staff, although there is some facility to postpone for staff who have worked less than three months. The rules apply regardless of any other pension contributions made by, or on behalf of, the employee, such as by contributions by a different employer.
Any employee paid up to £486 a month has a right to join the pension scheme if they wish. An employer must oblige an employee’s request but is not bound to make any contributions.
An employee paid between £486 and £833 a month has a right to opt in. If an employee makes a request to join the pension scheme then the employer must make contributions according to table below.
Any employee who is between 22 and the state retirement age (currently 67) and earning over £833 a month will be automatically enrolled. Regardless of any request made by the employee, each employee is enrolled in the company pension and the pension is funded according to the table below. An employee does not have to give permission to be enrolled.
If an employee who has been auto-enrolled does not wish to be a part of the pension scheme then this person will have to specifically opt out.
From when does auto enrolment apply to small businesses?
The staging date is the date from which an employer must start to comply with auto-enrolment rules. Where applicable, this would be the date from which contributions will be made to the employee’s pension.
For business with 30 employers or fewer, the staging date ranges between 1 June 2015 and 1 April 2017. Newer employer may have a staging date as late as 1 February 2018. If you are an employer, the Pensions Regulator will write to you to let you know the date from which your obligations arise.
It is only possible to auto-enrol from the staging date. However it is possible for a business to make a request for their staging date to be brought forward.
How much will I need to contribute?
Contributions are a percentage of ‘qualifying earnings.’ These are employment earnings between the lower and upper national insurance limit. It is therefore not possible for the minimum contribution alone to exceed the annual allowance for pensions.
The following table sets out the minimum requirements.
||Until 1 October 2017
||Between 1 October 2017 and 30 September 2018
||From 1 October 2018
The employee’s contribution will be deducted from gross pay. Therefore it is the amount after deduction of employee’s pension contribution that will be subject to tax.
There are a number of tax advantages to a pension contribution.
It is acceptable to provide employees with more than the minimum requirement.
Defined Contribution or Defined Benefit
A pension is a method of saving for retirement. Unlike usual savings the money cannot be accessed until the pension holder reaches retirement age. A Defined Contribution (or DC) pension fund increases in value when contributions are made. The contributions are invested with the aim of further increasing its value. This contrasts with a defined benefit scheme, where the pension benefit is known in advance. The benefit is based on earnings and length of time in employment. DC schemes are far more common in practice. The value of investments can go up as well as down.
What pension do I provide?
As an employer, it is a requirement to set up a pension scheme for the contributions to be paid into.
Coman & Co. Ltd are not financial advisers and therefore cannot advise on pension schemes. Many ‘household name’ insurers offer workplace pension schemes. However, some pension providers do not offer a service for that can satisfy the requirements of automatic enrolment.
What is a default investment fund?
Most pension providers offer a default investment fund. This is the fund that is chosen by the pension provider for any employees who have not stated the investments to be made with their pension money. It is specifically for employees who are either unwilling or unable to make investment decisions about their pension.
According to government reports more than four in five employees opt for the default fund provider. A typical approach by the insurance company is to invest in the stockmarket for younger pension holders. The aim is to grow the value of the pension. As retirement nears the pension will be invested in lower risk assets, such as bonds and gilts. This is to protect the value of the pension.
What is the alternative to a default provider?
It is possible to invest a pension in a host of funds, shares, bonds and other securities. A Self-Invested Pension Plan (or SIPP) allows its pension holders to take charge of how investments are made. Broadly, SIPPs allow the pension holder greater freedom to choose what, when and how much is invested in the fund.
Even if you are self-employed or a one-person company owner a SIPP or other pension may be suitable. SIPPS can even be used to purchase the commercial premises from which your business operates.
My employee does not wish to auto-enrol
If an employer has enrolled an employee in the scheme, it is a requirement that the employee remains a member of the workplace pension. However, it is possible for the employee to opt out of making any contribution to the pension.
Providing a workplace pension is costly to the employer. Nevertheless, an employer is not allowed to offer any incentive to prevent staff from joining the scheme. Employers are obliged to explain auto-enrolment to staff. The Pension Regulator has provided a template for this purpose. The benefit of employer contributions must be explained.
Notwithstanding, an employee may choose to opt out. Employees may, for instance, prefer greater take home pay, even if this means foregoing the extra amount paid into their pension by their employer.
If an employee opts out within one moth of joining the scheme a full refund for the employee’s contributions must be made.
I am a one person company, or a company where everyone is a director.
Provided no more than one of the directors has an employment contract is not necessary to operate a workplace pension. Unless the director specifically wrote an employment contract it is unlikely to exist. A letter from the Pension Regulator regarding any requirement to auto-enrol can be cancelled by following this link:
I have my own company, but have not received a letter from the Pension Regulator.
Correspondence would probably not be sent by the Pension Regulator to businesses that have indicated they will not be operating a workplace pension. This can be specified on the application to register as an employer.
Therefore no further action is necessary.
I am not required to operate a workplace pension, but appreciate the retirement planning implication of not having any pension.
Consider the benefits (helped by the tax system) of making pension contributions. The most tax efficient method as a one-person-company is to make contributions as an employer.
How is auto-enrolment operated via the payroll?
The deductions from an employee’s pay and total pension contributions are included on the payslip. Most payroll software will automatically link to the pension provider. The contribution information is transferred to the pension fund and the employer settles the contribution into the pension fund accordingly.
Coman & Co Ltd. operate a payroll service for small businesses. As part of payroll we will assist with generating the electronic file sent to your pension provider to meet the compliance requirements. We can ensure that the submission made by the software follows the format acceptable to your pension provider.
After the staging date
Once auto-enrolment has started, there are further requirements.
The employer is required to explain to staff the relevant implications of auto enrolment and the pension fund that the employer has selected on behalf of the company. The Pension Regulator provide a template for this purpose.
The pension regulator has stipulated that employers file a compliance declaration within five months of the staging date.
It is a requirement to keep auto-enrolment records for six years, and opt out requests for four years.
Fines apply for non-compliance.
Employer contributions can be deducted from profits chargeable to corporation tax.
The amount contributed by the employer is not a taxable benefit. Contributions by the employee are deducted from earnings subject to tax and national insurance. More information can be found here.
Up to £150 incurred on pension advice provided to an employee is a tax free benefit. The additonal costs of employer contributions will be partly offset by the recent employment allowance, a benefit mainly for small businesses.