If you are an employer, there is a strong chance that you will have encountered Workplace Pensions (also known as Auto Enrolment Pensions). These are the mandatory pension schemes introduced by the Government in 2012. They have been successful in introducing millions of employees to pension schemes over the last 6 years.
To date, the minimum contributions have been quite modest. Employees have had to contribute 1% of their qualifying earnings (earnings above £5,876 p/a) whilst benefitting from tax relief. Employers have also had to contribute 1%.
However, the contribution rates are increasing. With effect from 6 April 2018, the employer’s contributions will increase to 2%, whilst the employee’s contributions will treble to 3%.
That's not all. In addition, the contribution rates are set to increase again from 6 April 2019. Employers will have to contribute 3% and employees will have to contribute 5%. For employees, that's a five fold increase from current levels.
So far, there have not been many employees who have opted out. This has been heralded as a success of Workplace Pensions. However, it is anticipated that employees may change their minds when the contribution rates rise. Although they will actually benefit from higher employer contributions, they will see a drop in their take home pay from their higher contributions.
The initial letters which you will have sent out should have highlighted the fact that contributions would increase. However, it would be a good idea to remind employees of this fact. This would allow them to take action sooner rather than later.
We have done a lot of work over the last 6 months in respect of Auto Enrolment (also known as Workplace Pensions), predominantly in (a) how it affects our clients, and (b) what service we can provide to our clients. Whilst Auto Enrolment started in 2012, the initial focus was on large employers. However, it will start to affect employers with less than 50 employees from this month:
One area which has attracted a lot of attention, particularly as the focus shifts from large employers to small employers, is the situation regarding small limited companies where the only people working for the company are directors.
The key concept behind Auto Enrolment, as the name suggests, is that employers MUST set up a pension scheme for their employees who qualify, and MUST automatically enrol those employees into the scheme. If the employees then decide they wish to opt out, that is their decision, not the companies. Indeed, it is illegal to try and persuade qualifying employees from not wishing to join a scheme.
However, this is a bit ridiculous where the only employee is a director. In those circumstances, if a director wants his company to pay into a pension scheme for him, then he would simply set up a pension scheme. If he doesn’t, then it would be very onerous to set up a scheme which isn’t required.
Therefore, the Pensions Regulator has created a simplified procedure if:
Essentially, if the company considers that it does not have any employees who could potentially ask for a pension under Auto Enrolment, and it wishes to avoid the scenario of setting up a pension which will not be used, it can simply send an email to the Pensions Regulator confirming that it doesn’t qualify. Of course, if the company’s circumstances change in the future, it will have to let the Pensions Regulator know.
Further details, including an email template to send to the Pensions Regulator, can be found here. If you need help, please get in touch.
There has been a lot of activity in respect of workplace pensions recently, with plenty of media coverage. We have many clients who are employers and are concerned about the implications for their business. Therefore, we thought it would be useful to outline how workplace pensions will affect small business.
What are Workplace Pensions?
They are the Government’s response to the realisation that not enough people are saving for their retirements, which is particularly relevant given that we have an aging population which will place much more stress on the Government coffers for the state pension.
What is the Idea?
The idea is that employees will be automatically enrolled into a pension scheme through their employer. They can choose, if they wish, to opt out.
When are they being introduced?
The first enrolment program started on 1 October 2012, but these affect the largest employers. Businesses who employee between 499 and 50 employees will be affected in 2014, and businesses with less than 50 employees will see auto enrolment between August 2014 and February 2016.
Who will be affected?
Employers have to automatically enrol workers who:
What are the employer’s duties?
Employers will need to:
Employers with an automatic enrolment duty will need to choose a pension scheme they can use for automatic enrolment. Information from the regulator will be available to help inform this decision later in the year.
What are the minimum contributions?
There are minimum contributions payable by both the employer and the employee, which are being increased over time:
| Total contribution required | Minimum employer contribution | Worker contribution | Tax relief | |
| October 2012 to September 2017 | 2% | 1% | 0.80% | 0.20% |
| October 2017 to September 2018 | 5% | 2% | 2.40% | 0.60% |
| October 2018 onwards | 8% | 3% | 4% | 1% |
These minimum contribution levels only apply to earnings over a minimum amount (currently £5,564) up to a maximum limit (currently £42,475). For example, if someone was earning £16,000 a year, the minimum percentages apply to £10,436 (the difference between £5,564 and £16,000). Overtime and bonus payments are included in your earnings.
More information, including a check as to when employers will be affected, can be found at Gov.uk and the Pensions Regulator.
Thanks to Joe McKenna of Clear Finance who provided assistance in writing this article.
