An Employer’s Introduction To Auto-Enrolment Pensions
If you intend to employ workers in the UK, you must ensure that you take automatic enrolment duties into consideration. What is automatic enrolment? Automatic Enrolment is a government initiative to encourage people to save more for their retirement. Introduced via the Pensions Act 2008, automatic enrolment requires every employer in the UK to complete certain duties, including automatically enrolling any ‘eligible’ workers onto a qualifying workplace pension scheme and contributing towards their pension pot. The Pensions Regulator is a public body that protects workplace pensions in the UK and ensures all employers are complying with pension legislation.
If you are an employer, especially a new employer, and are interested in knowing about pension auto-enrolment, we’re here to educate you about auto-enrolment and the duties of employers.
Auto-enrolment pensions
Before October 2012, it was the employer’s prerogative whether to offer their staff access to a workplace pension. If they did choose to do so, the decision to join the pension was up to the employees. As a result, there was a large portion of the workforce without any pension arrangements, and many found living a comfortable life post-retirement challenging with only the state pension to draw from.
Since auto-enrolment became law in 2012, employers have been legally required to complete certain duties, including enrolling their eligible employees into a qualifying workplace pension scheme automatically (i.e., no action is required on the employee’s part).
According to the Office of National Statistics, in April 2020 nearly eight out of ten UK employees (78%) had a workplace pension compared with less than five out of ten in 2012 when Automatic Enrolment was introduced.
Thanks to automatic enrolment, people can counter retirement savings shortfall by building up savings that can serve as an income after retirement. In addition to contributions from their employer being added to their pension pot, most workers will also benefit from tax relief on their pension contributions.
Employees eligibility
Only eligible employees must be automatically enrolled, which begs the question: what makes an employee eligible? In the current tax year (2022/23), an employee is eligible if:
● They ordinarily work in the UK
● They are over 22 years old and under the state pension age
● They earn above £10,000 a year
● They are not already enrolled in a qualifying workplace pension scheme
Therefore, if any of your employees meet the above requirements, you must auto-enrol them into your workplace pension scheme. They will then have the option of ‘opting out’ of the pension. You can only exclude eligible employees from automatic enrolment if they are:
● Directors & Genuine Partners of an LLP or Limited company.
● Employees with pension protection who can provide evidence that they have reached their lifetime allowance.
● Employees who have handed in their notice or are under notice of dismissal and their enrolment date falls in the notice period.
You must note that provided an employee meets the auto-enrolment requirements, they are also covered if:
● They are on a short-term contract
● An agency pays their wages
● They are away on maternity, adoption, or carer leave
Perhaps you are wondering what happens when an employee doesn’t meet the above criteria. Such employees will not be ‘auto’ enrolled but they have the right to ask you to add them to the pension scheme. However, you will only need to contribute to their pension if they earn above £6,240 per annum (this figure may change in future).
Duties of employers
Automatic enrolment duties apply to new employers from the start date of their first worker. This date is thereafter known as their Duties Start Date. All employers in the UK must comply with their automatic enrolment duties to avoid fines by The Pensions Regulator (TPR).
We have listed your duties below; the order may vary depending on how you manage your automatic enrolment.
1. Assess your employees to see if any are eligible
You will need to assess all your workers to see if any are eligible for automatic enrolment. If none of your staff are eligible, you will not need to set up a pension scheme unless a worker asks to join one. You will still need to complete other duties including writing to your employees and completing the Declaration of Compliance. You will need to continue to assess your employees every pay period to check if anyone has become eligible that previously wasn’t (for instance, someone may turn 22 or their earnings may increase above £10,000).
2. Write to your employees
You are legally required to write to all your employees within the first 6 weeks after their start date to inform them of automatic enrolment pension legislation and how it will apply to them. You will need to keep records/logs of these communications so they can be provided to The Pensions Regulator should they audit you.
You can delay enrolling your staff for up to three months – this is known as postponement. You must still write to them within the 6-week period. Employees can ask to be enrolled earlier if they do not want to wait, and their right to do this must be included in their communication.
3. Set up a pension scheme
If you have eligible employees, you will have to set up a scheme. You will also need to set up a scheme if a non-eligible worker asks to join the workplace pension. Choosing a pension scheme may take time, but you must get it sorted out as soon as possible. What is the best advice we can give on this? Ensure the pension scheme is suitable for auto-enrolment.
4. Calculate the contributions
You will need to enrol any eligible workers on to a qualifying pension scheme and then you both must contribute a certain amount to their pension every pay period.
The statutory minimum amounts that the employer and employee must contribute to the pension vary according to which elements of pay are included in the calculation. The standard definition of pensionable earnings set by TPR are known as qualifying earnings. In the current tax year (2022/23), qualifying earnings are all earnings a worker makes between £6,240 and £50,270 per year. The total contribution required is 8% of the worker’s qualifying earnings with the employer contributing at least 3% and the employee making up the difference.
5. Pay the contributions
The employee’s contributions are deducted from their pay, and you must then pay over the employee and employer contributions to the pension provider. Payment must be made by the 22nd of the month following their deduction from the employees’ pay. Prior to the payment, you will need to communicate the pension breakdown to your chosen pension provider. This is usually done via a file upload to their online portal.
If an employee opts out of the pension scheme within a certain timeframe, they will be eligible for a refund of the contributions they have paid in so far. The refund would need to be processed through their next pay slip. Once the deadline to opt out has passed, the employee can still ask to stop contributing to the pension at any time, however, any contributions paid in so far will remain in their pension pot until they reach the appropriate age.
6. Declare your compliance
Within the first 5 months after your duties start date, you must complete an online form to declare your compliance with your legal duties. Note that you must complete the Declaration even if you do not have any eligible employees.
If you are exempt from automatic enrolment duties because you don’t have any staff, you can advise TPR of this here: https://www.thepensionsregulator.gov.uk/en/employers/what-if-i-dont-have-any-staff. You will need to update TPR if you take on staff in future.
7. Re-enroll employees every 3 years
Every three years from your Duties Start Date, you will need to re-enrol any eligible employees that have previously left your pension scheme. You will then need to redeclare your compliance to TPR. These employees will have the option of opting again if they still don’t wish to remain in the pension scheme.
Pension auto-enrolment is a must for every employer in the UK. However, it can be complicated and time consuming because of the various challenges that can arise. As automatic enrolment pensions are processed through the payroll, it makes sense to trust your auto-enrolment responsibilities to a payroll bureau like Pay Check. We can take the burdensome administration off your hands so you can concentrate on running your business. Pay Check offers a range of automatic enrolment services including our end-to-end PCNEST service which has been designed for employers that are just beginning their duties and are looking for a first-class pension solution that is cost-effective, simple to administer and guarantees compliance. For your bespoke quote, get in touch today!