UPDATED: Pensions auto enrolment (AE) was introduced by Government to help employees save in a tax efficient way for their retirement with the help of their employer and to reduce their reliance on the State Pension. Under AE legislation, employers have a legal obligation to automatically enrol eligible employees into a workplace pension scheme and pay contributions.
The questions businesses most need to consider are:
1. When do my pensions auto enrolment obligations begin and what do I need to do?
2. Which of my employees do I need to automatically enrol?
3. What contributions do I need to pay?
4. What if an employee doesn’t want to join the pension scheme?
5. What is the tax position on pension contributions?
6. What pension provider should I choose for my pension scheme?
7. Once I’ve set up a pension scheme and started assessing and auto enrolling employees, there’s nothing further to do, right?
When do my pensions auto enrolment obligations begin and what do I need to do?
If your company was in existence prior to 1 October 2017, you would have been given a ‘staging date’ by The Pensions Regulator. The staging date is the point at which you would have needed to start assessing your employees and auto enrolling eligible employees into a workplace pension scheme.
For companies that started on or after 1 October 2017, your pensions auto enrolment duties commence on the day that you hire your first member of staff. This is known as your ‘duties start date’.
AE rules can be complex but in summary, companies must:
- Have a pension scheme
- Regularly assess their workforce to determine their eligibility for auto enrolment
- Auto-enrol all eligible employees into a pension scheme and pay contributions
- Communicate with employees
- Re-enrol employees who have opted out every three years (known as triennial re-enrolment)
- Keep adequate records
- Complete a declaration of compliance with The Pensions Regulator
Which of my employees do I need to automatically enrol?
There are three types of employee for pension auto enrolment purposes, which are set out below:
Eligible jobholder – also known as a type 1 worker – Any employee who is aged between 22 and State Pension age and earns more than £10,000 per year must be auto-enrolled into a pension scheme. You have a legal obligation to pay at least a minimum level of contributions (detailed in the next section).
Non-eligible jobholder – also known as a type 2 worker – Any employee who earns more than £6,240 up to £10,000 per year, or any employee who earns more than £10,000 per year and is younger than 22 or older than State Pension Age, does not need to be automatically enrolled. However, they have a right to opt into your pension scheme and if they choose to do so, you must pay at least the minimum level of contributions, as you would for an eligible jobholder.
Entitled worker – also known as a type 2 worker – Any employee who earns less than £6,240 per year, regardless of age. They do not need to be automatically enrolled and they also have a right to opt into the pension scheme if they wish to do so. However, if they do choose to opt in there is no legal requirement for you as the company to pay any pension contributions.
Regardless of which category they fall into, all employees must receive written communications which sets out their rights under auto enrolment.
What contributions do I need to pay?
The level of contributions will depend on how you calculate pensionable pay. The minimum requirement is for contributions to be paid on an employee’s earnings between £6,240 and £50,270 in the tax year 2023/24 (known as qualifying earnings). The current levels on this basis are set out below.
|Employer minimum contribution||Employee contribution||Total minimum contribution|
If you calculate pension contributions on a different basis (e.g. if they are based on basic pay) the minimum contribution requirements will be different. Provided that you are paying at least the minimum level of contributions you have flexibility on the contribution levels. For example, some employers choose to pay more than the minimum employer contribution, which in turn can reduce the minimum contribution that the employee has to pay. However, you will have to provide a certificate confirming the basis of your scheme contributions and that they meet the minimum levels. This certificate will need to be renewed up to every 18 months.
What if an employee doesn’t want to join the pension scheme?
Employees have the right to opt out within 30 days of being auto enrolled and if they do so within this timescale, they are entitled to receive a refund on any employee contributions that were paid during that period. Employees can stop contributions at any time after this point, but they would not be entitled to a refund on previous contributions. Employees should also be clear that if they opt out then this will impact the payout they will have receive at retirement.
Employees can only opt out after they have been auto enrolled. If you have a new employee advise you that they don’t wish to join the pension scheme, they must still be auto enrolled and then can opt out after that point.
Employers are not allowed to encourage employees to opt out of the pension scheme and there are significant financial penalties for companies that are found to have done this.
What is the tax position on pensions auto enrolment contributions?
Employer pension contributions are an allowable expense and therefore can be offset against profits for corporation tax purposes.
Employee pension contributions qualify for tax relief and the manner in which tax relief is granted will depend on the type of arrangement offered by the pension provider. In summary, there are two arrangements:
Net pay arrangement: Contributions are deducted from gross pay, therefore individuals automatically receive their full tax relief up front.
Relief at source arrangement: Contributions are deducted from net pay, with the pension provider automatically adding tax relief of 20 per cent to the pension contribution. Higher rate taxpayers would need to claim any additional tax relief from HMRC.
Which pension provider should I choose for my pensions auto enrolment scheme?
There are a number of pension providers which offer workplace pension schemes that are suitable for auto enrolment. There are a range of factors to consider when choosing a pension provider. These include:
Charges – Charges will impact the value of your employee’s pension pots so it is important that you consider the charging structure operated by your provider. All providers will charge an annual fee which is usually expressed as a percentage of the individual’s pension value (commonly referred to as an annual management charge). This charge is paid by the individual members and is deducted by the pension provider. In addition, some providers will also charge employers either an up-front or ongoing fee to operate the pension scheme.
When considering charges, you should take into account the support and range of services you receive. Cheapest is not necessarily best.
Service – Will your chosen pension provider be able to provide a good level of service, both to you as the employer and your employees? Poor administration can lead to complaints from employees and additional work for you as you spend time resolving issues with the provider.
Investment options – All pension contributions are invested into a default investment fund, unless an individual opts to select their own funds from the range offered by the pension provider. You should ask your provider what the objective of the default investment option is.
Communications support – You are required to issue communications to employees with regards to auto enrolment. In most cases, these communications tend to be issued by the pension provider however you should make sure that your pension provider can and will do this. Even where the provider issues the communications, it is ultimately your responsibility as the employer to ensure that that the communications are sent, contain the necessary wording and are issued within the required timescales.
Once I’ve set up a pension scheme and started assessing and auto enrolling employees, there’s nothing further to do, right?
Wrong! Auto enrolment is an ongoing process, so it is important that you factor this into your regular business processes.
You should review your pension provider on a regular basis to ensure they are continuing to meet you and your employees’ needs. You are able to switch your pension provider should you wish to do so. This should be completed as part of an annual governance review that will also ensure your auto enrolment processes and records continue to be compliant on an ongoing basis.
Auto enrolment can be complex. Fortunately, there are lots of places you can obtain support. The Pensions Regulator website contains useful information on auto enrolment and your payroll provider, if you use one, should be well-versed in auto enrolment. Employee benefit consultants can provide ongoing advice and support with regards to auto enrolment and helping you to choose and review your pension provider.
Finally, remember that while employers have certain obligations under auto enrolment, if you are focused on doing this properly you can use your workplace pension scheme as a valuable tool to help recruit and retain the best employees for your business.
James Brown is employee benefits consultant at IFAs Chase de Vere.
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