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The UK government introduced pension auto enrolment in order to encourage more people to save for their retirement.
In the past, many workers missed out on pension benefits because their employer didn’t offer them a pension, or they didn’t apply to join their company’s pension scheme. Automatic enrollment changes this. It makes it compulsory for employers to automatically enrol their eligible workers into a pension scheme. The employer and the employee must pay money into the scheme.
What is Pension Auto-enrolment?
UK employers must provide access to a pension for eligible workers. Employees can choose to opt out of auto-enrolment if they wish to.
The rules are complex and are overseen by The Pensions Regulator.
There are exemptions for companies with only one director and those with family members who are a director if:
- They don’t work under a contract of employment (so aren’t an employee),
- They don’t have a contract to perform work or services personally and are undertaking the work as part of the business.
The Pensions Regulator will write to you setting out the action you must take in relation to pension auto-enrolment. If the Regulator hasn’t contacted you, and you employ staff, contact the Regulator immediately on 0345 600 1011, to ensure you meet your PAE obligations.
The Pensions Regulator may impose fines if you don’t meet your auto-enrolment responsibilities, ranging from a £400 fixed penalty to a varying daily escalating penalty from £50 to £10,000.
Who is affected by Pension auto-enrolment?
Pension auto-enrolment affects every employer in the UK, regardless of the size of the business. All employers must now provide access to a workplace pension scheme and automatically enrol eligible employees. An employee is eligible for auto-enrolment if all of the following conditions apply to them:
- At least 22 years old
- Not yet at State Pension age
- Earn at least £10,000 per year (for the 2022/23 tax year). This threshold is set by the Department for Work and Pensions and may increase each year. The Pensions Regulator publishes earnings threshold information on their website)
- Normally working in the UK under a contract of employment.
Is my company exempt from auto-enrolment?
You won’t have any auto-enrolment responsibilities if any of the following conditions apply:
- You’re a sole director of an organisation or business with no other staff
- Your organisation or business has a number of directors, none of whom has an employment contract, with no other staff
- Your organisation or business has a number of directors, only one of whom has an employment contract, with no other staff
- Your organisation or business has gone into liquidation
- Your organisation or business has been dissolved
- You’re a partnership or limited liability partnership and you have permanently ceased trading
- You’re a sole trader and you have permanently ceased trading
- You’re an individual and you no longer employ someone in your home (a cleaner, nanny, personal care assistant etc).
We've got a handy article to help you understand what your legal employment status is.
Many businesses consisting only of directors already make contributions to a pension scheme on behalf of their directors as an allowable business expense. However, you should still notify The Pensions Regulator your business is exempt from auto-enrolment and that the rules don’t apply to your business.
If you’re a Crunch client and you operate as a sole director company with no employees, we’ll automatically notify The Pensions Regulator your business is exempt.
You can let The Pensions Regulator know if you believe you're exempt from auto-enrolment and understand more about the reasons for exemption online at the TPR website.
What do I need to do as an employer?
When the government introduced auto-enrolment they did so over a number of years, with the largest employers starting first and then eventually smaller employers. The process is now complete and employers should now have an auto-enrolment scheme in place if required.
If you already operate a pension scheme for your employees, you should check with your pension provider to see whether it’s eligible for auto-enrolment.
You need to nominate a contact for your company who will be responsible for your company’s auto-enrolment. They’ll then receive all communications from The Pensions Regulator.
If you become an employer for the first time, your legal duties will commence as soon as your employee(s) start working. You’ll need to ensure you have a compliant scheme set up within six weeks of employing your first worker.
The main duties to keep you compliant once your pension scheme is set up is the administration of the scheme, managing leavers, joiners and making contributions to the scheme – for this you’ll need some information from each of your employees:
- Date of birth
- National Insurance Number
- Contact details
- The amount they’ve been paid
When calculating the amount of earnings your employees receive, you need to include:
- Salary
- Wages
- Commission
- Bonuses
- Overtime
- Statutory sick pay
- Statutory maternity pay
- Ordinary or additional statutory paternity pay
- Statutory adoption pay.
You’ll have to pay a minimum contribution set by the government for every eligible member of staff (see table below). There may also be other costs to consider, such as getting the right software and seeking professional advice on how to implement the scheme.
The Pensions Regulator has information on their website that can give you a rough calculation of how much you’ll have to contribute towards pensions as a monetary amount.
Who do I have to auto-enrol?
You must assess all of your employees to see whether they must be automatically enrolled into a pension scheme. However, certain staff, depending on age and earnings, may not need to be enrolled automatically but do have the right to join or opt-in to a pension scheme.
This can be a complex area to navigate and the following table provides a helpful guide to assist you in assessing your employees and deciding whether they need to be enrolled in a pension scheme automatically.
Table 1 – How to see if your employees need to be auto-enrolled
*SPA – State Pension Age – this differs for men and women you can check the the relevant State Pension Age for employees using the Gov.uk site
What’s the difference between joining and 'opting-in' to a pension scheme?
As the above table indicates, assessing the status of your employees for auto-enrolment can be complex. The final decision is important because your chosen pension scheme may need to meet certain minimum standards and you may need to make contributions to the scheme as an employer.
If a member of staff decides to opt in, the pension scheme must meet the government's standards for auto-enrolment and the employer must make the minimum (employer) contribution set by the government.
However, if someone asks to join a pension scheme, the pension scheme doesn’t have to meet the government’s standards for auto-enrolment and the employer does not have to make any (employer) contributions.
It’s against the law to try and affect your employee’s decision to opt-in or out. Examples of this would include offering cash bonuses or withholding pay for opting out.
Opting out of a pension scheme
'Opting out' is when an employee decides to leave a pension scheme within a month of being enrolled. Staff that have been enrolled and those who have opted in can choose to opt out. The key points you need to know about opting out are:
- Employees who have been automatically enrolled or who have decided to opt in to a pension scheme have the right to opt out
- The decision to opt out of the pension scheme must be taken freely by the employee
- Employees cannot opt-out of a pension scheme until after they’ve been automatically enrolled
- The opt-out period is one month from when active membership is created, or they receive their letter with the enrolment information, whichever is latest
- Employees opt-out by getting an opt-out notice from the pension scheme which they then complete and give to their employer
- The employer must issue a full refund of any contributions the staff member has made into a pension scheme within a month of receiving a valid opt-out notice.
An employer must not actively encourage an employee to opt-out of their pension scheme (which could be considered an ‘inducement’). Any decision to opt-out must be taken freely by the employee without influence from the employer.
What contributions do I have to make as an employer or employee?
The government reviews the earnings thresholds and minimum contributions employers and employees must make to their pension scheme each year. Any changes will take place at the start of a tax year, tax years run from 6th April to 5th April.
Table 2 – What are the minimum employee and employer contributions to an auto-enrolment pension scheme?
* Tax year runs from 6th April to 5th April
How can Crunch help with auto-enrolment?
We offer our clients a full service to help you with pension auto-enrolment if you need to enrol your employees. We can set up your auto-enrolment pension scheme and administer this monthly including running your payroll.
If you’re already a Crunch client then speak to your client manager about adding our auto-enrolment service.
If you’re not yet a Crunch client then you can speak to one of our friendly advisors on 0333 230 4418 for a free consultation about how our range of accounting services could help you and your business.
