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Auto enrolment pension options for small businesses

Get to grips with your workplace pension auto enrolment responsibilities to ensure your small or start up business doesn’t fall foul of the law.

Workplace pensions are a legal requirement for all UK businesses. Even if you employ just one person, it’s compulsory to provide a workplace pension scheme for eligible workers and pay contributions into that scheme on their behalf.

This can seem daunting to small businesses that may lack the time and skills to get to grips with pensions, while getting expert advice can be costly for a cash-strapped start up. However, as there’s no way to dodge your legal responsibilities as an employer, you’ll have to tackle workplace pensions if you haven’t yet done so.

It’s worth creating a plan and swotting up on what you need to do to so your business is ready.


What is auto enrolment?

Automatic enrolment is a government initiative designed to help people save for their retirement through a workplace pension scheme. Under the Pensions Act 2008, every UK employer must automatically enrol eligible workers into a pension scheme and make contributions towards it each pay period.

If you fail to set up a workplace pension scheme for your employees by the auto-enrolment deadline set for your company, you’ll face a penalty. Fines also apply if you fail to complete ongoing auto-enrolment duties.


Does automatic enrolment apply to me?

Not every business is required to set up auto enrolment and there are different rules in place for different types of businesses. In general, if you employ someone who has an employment contract, you will need to set up auto enrolment to a workplace pension. There are some exceptions:

  • Sole trader or self-employed – You do not need to set up a workplace pension scheme or auto enrolment if you’re the sole director or owner of that company, and do not employ anyone else. As soon as you take on another person (such as an assistant), you will need to set up a workplace pension.
  • Limited companies – Most limited companies will need to set up a workplace pension, the exception being if you’re the only director of the business with no staff.
  • Married couples or civil partners – If you run a limited company with your spouse or with someone you’re in a civil partnership with, and both of you are directors and one or neither of you have an employment contract, then you do not have to set up a workplace pension. If both of you have employment contracts, then you will need to set up a workplace pension.

The rules are complex. For the latest information, visit The Pensions Regulator for up-to-date help and advice and a list of the duties you need to carry out. You can also tell The Pensions Regulator that you’re exempt from setting up auto-enrolment.


Who do I need to enrol?

If you employ staff then you will need to set up a workplace pension with auto enrolment. Eligible workers for auto enrolment are those aged between 22 and the state pension age, who earn at least £10,000 in a year. This figure is reviewed by the government each tax year.

Non-eligible workers can ask to be enrolled into your scheme. These are:

  • Employees aged between 16 and 74 who earn more than £5,824 (2016/17). While they don’t have to be auto enroled, they have the right to opt in. If they choose to do so, you must make contributions to their pension; and
  • Employees aged between 16 and 74 who earn less than £5,824 (2016/17) also have the right to join the pension scheme you provided, but you’re not required to contribute.


What are my responsibilities as an employer?

As part of the Workplace Pension Reform, there are several steps you must take to ensure your business is ready for auto enrolment. These include:

  • set up and register a pension scheme suitable for auto enrolment;
  • communicate the new pension rules with your employees in a written letter;
  • assess all staff eligibility at every pay period;
  • automatically enrol all eligible jobholders;
  • register your business with The Pensions Regulator and keep a record of this;
  • contribute to your employees’ pension pots on a regular basis;
  • manage the auto enrolment, including the joining and opt-out process; and
  • maintain up-to-date and accurate records on how you have fulfilled your responsibilities.


When must I start auto enrolment?

The deadline for enrolling your employees into a workplace pension scheme is called your staging date. This is determined by the number of employees on the 1 April 2012 in your PAYE scheme and your PAYE reference number. Even if the number of employees changed after that date, your staging date will remain the same.

Staging started in October 2012 and large companies with more than 120,000 employees will have already completed the process. For small businesses with 30 employees or less, the auto-enrolment process began rollout in January 2016 with different staging dates continuing through 2017.

Businesses without PAYE schemes must start the auto-enrolment process on 1 April 2017. New employers who set up business after 1 April 2012 will have staging dates between 1 May 2017 and 1 February 2018.

The Pensions Regulator will write to you to confirm your staging date. You can also check your staging date using your PAYE reference number on The Pensions Regulator’s website.


Can I change my staging date?

Employers can change their staging date for business purposes, such as aligning it with the beginning of their financial year. However, the new date must be earlier than the original staging date. Once brought forward, you cannot revert to the original staging date and you must still comply with auto enrolment regulations.

To bring your staging date forward, notify The Pensions Regulator.

An employer can choose to delay enrolment for one or all staff into a workplace pension scheme for up to three months. You can postpone for any business reason, for example you may be employing short term or temporary staff. You must write to employees to tell them you’re postponing automatic enrolment and the reason why.


What happens if I miss my staging date?

Businesses that fail to meet their auto enrolment duties face heavy fines. If you miss your staging date, get in touch with the Pensions Regulator as soon as possible. You may be able to use ‘postponement’ to avoid breaching legislation if you act within three months of the staging date.

The Pensions Regulator will ask you to make up for the months when you haven’t been compliant with auto enrolment and interest may be required on unpaid contributions. If you continue to not comply you’ll face a fixed fee and daily penalties based on the number of your employees and face criminal prosecution.


Choosing a workplace pension

To meet your auto enrolment duties, you’ll need to choose a pension scheme that both you and your employees will pay into to help fund retirement in later life. Unless you’re using an existing pension scheme for automatic enrolment, you must find a scheme yourself or get help from your accountant or a financial adviser.

You should start looking at least six months before your staging date as many schemes take a while to set up. Identify your staging date, then work back from there to set a deadline for choosing a workplace pensions scheme.

Don’t be tempted to choose the first one you look at – a pension scheme has huge ramifications for your business and your staff. Take your time to choose one that works best for your employees and your business needs.

  • Get professional advice – If you’re new to pensions, seek guidance from an expert adviser.
  • Cover the basics – Will it accept all your staff? How much will it cost? Does it use the best tax relief method for your staff and will it work with your payroll?
  • Check the criteria – The pension scheme must meet certain criteria, for example employees mustn’t be required to do anything to join the scheme nor should they have to choose their own investments. Check that all your staff can join – some schemes only accept staff that earn above a certain amount.
  • Assess the costs – Find out what costs and charges you and your staff will pay. Different pension providers charge in different ways – either a one-off upfront charge for the life of the pension scheme or an ongoing monthly charge. Many charge an exit fee for employers who change pension schemes and some offer lower charges for low-paid staff.
  • Look at tax relief – Check how the pension scheme handles tax-relief for your employees. For example, staff who don’t pay income tax will only get tax relief if you choose a scheme that uses relief at source. If your chosen scheme uses net pay arrangements with no tax relief, these employees will pay 20% more for their pension.
  • Make sure it’s regulated – Choose a pension scheme that’s regulated by the Financial Conduct Authority.

The Pension Regulator website lists pension scheme suitable for small businesses, some of which have automatic enrolment features.


Staff records and payroll process

Before you reach your business’s staging date, be sure to check that all employee records are up to date including date of birth, contact details, national insurance number and salary. If you use a payroll system, check that it will work with your chosen pension scheme and can carry out all the auto enrolment tasks. The payroll provider should be able to help you with this.

If you don’t already use a payroll system or your existing one won’t work with auto-enrolment, choose one that offers automatic enrolment functions to make life easier. For a list of free-to-use and paid-for payroll software, go to the government’s Find payroll software directory.


How much do I have to contribute?

Initially, employers must contribute 1 per cent of the employee’s qualifying earnings between £5,824 and £42,385 (2016/17). The total contribution made by employer and employee must be at least 2 per cent.

From 1 April 2018, this increases to an employer contribution of at least 2 per cent, and a total contribution of at least 5 per cent.

From 1 April 2019, the employer contribution rises to 3 per cent and the total contribution to 8 per cent.

These are minimum contributions levels, and as an employer you can pay more into the pension fund if you wish.


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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

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