If you’re an employer, the law requires you to have a workplace pension set up, so that you can automatically enroll those known as ‘eligible jobholders’, i.e. those who fit the criteria of:
• being aged between 22 and the state pension age (this age threshold varies, you can check what’s relevant for an employee here)
• being based in the UK; and
• earning over £10,000 per year
You do not need to ask the employee’s permission to auto-enrol them.
Although the term automatic enrolment is used, some employees may not want to be enrolled (perhaps they have their own pension already sorted, for example). Generally, the employee has 1 month from the date they were officially confirmed as an active member of the pension scheme to opt out. They must serve you with a valid opt-out notice for this intention to take effect. (The opt-out notice is generally only available from the pension provider as a safeguard for the employee, evidencing that the intention to opt-out is genuine and freely made.)
If an employee opts out in this time frame, they are entitled to the refund of any pension contributions so far made (less any tax due on them – since the pension contribution is entitled to be made tax-free). Employers are also entitled to the appropriate refund of their contributions.
If actioned during this time frame, the employee will be treated as though they never were a member of the auto-enrolment scheme and this will remain the case for a 3-year period, when auto-enrolment must once again be made, unless the relevant employee once again makes clear that they do not wish to be included.
If the employee opts out later on, they’re always free to do so, but the rules of the scheme will dictate what happens to payments already made and usually, these contributions will not be refunded and a pension to the value of the contributions already made will continue in place in the employee’s name, in spite of no further contributions.
While eligible jobholders are automatically enrolled, you must also enroll non-eligible jobholders into the scheme if they ask you to do so.
Eligible jobholders must be enrolled so that their enrolment takes effect from the date that they first become eligible for enrolment (which might be their first day of work for a new recruit). Their enrolment must be complete within 6 weeks of this date.
Sole directors of businesses with no other employees do not have to undertake auto-enrolment. However, at the point where your business takes on a second worker, this exemption expires; you’ll then need to apply the auto-enrolment to both employees.
How, and how much, you need to pay
How much is paid gets calculated based on the employee’s qualifying earnings.
There is a minimum threshold, below which earnings are not counted, up to a maximum threshold, above which no further obligations are imposed on the employee or you, as the employer.
This usually means the total earnings between £5,876 and £45,000 a year, before tax. It includes:
• overtime and
• statutory sick, maternity, paternity and adoption pay.
Currently, both you as the employer and the eligible worker each need to pay at least 1% of worker’s qualifying earnings into the workplace pension scheme. In the worker’s case, this minimum amount (and any worker-requested increase) can be taken from their eligible earnings. As their employer, you need to pay an additional minimum 1% contribution on top of this. This minimum level is set to increase substantially for both employers and workers over the next few years. Find out more about this here.
You pay by deducting the contributions from your employee’s pay every month and then paying these contributions into the pension scheme by the date you’ve agreed with your provider. If the payment is late or not the correct amount, you can be fined, so it’s important to read the terms of your pension scheme thoroughly and to ensure that you have robust systems in place to deliver the payment on time. Many HR and accounting service providers now include this as part of their service, which can be an efficient and reliable means of de-risking the process.
What if you don’t enroll your employees?
The penalties are pretty stiff.
You need to get this right first time and we recommend taking expert advice if you’re worried about the adequacy of your current arrangements, or if you want help setting up for the first time you bring someone on as an employee.
A penalty if you haven’t automatically enrolled an eligible jobholder
If you hire an eligible jobholder without automatically enrolling them into your staff pension scheme, you could receive a fixed penalty notice, typically set at £400 per member of staff.
If you fail to remedy that breach and continue to fail to comply with a fixed penalty notice or any other compliance or statutory notice. The pensions regulator could also issue an escalating penalty that could be between £50 a day to as much as £10,000 per day (depending on the number of staff members you hire).
Penalties for unpaid or late contributions
There are also penalties for late or unpaid contributions. Worker and employer contributions must be paid into the pension scheme within certain timescales. Where those contributions are overdue, the Pensions Regulator can issue compliance or unpaid contributions notices and also charge interest on the amount of those unpaid and overdue contributions.
The ‘Prohibited Recruitment Conduct Penalty’
This penalty is imposed on employers who contravene the ‘prohibited recruitment conduct’ provisions in the legislation that prohibit employers from unlawful conduct which may induce an employee or worker to opt out of auto-enrolment. Examples include;
• advertising a job on the basis that it is only open to someone willing to opt-out of the employer’s scheme;
• asking applicants at interview or pre-selection stage whether they intend to opt-out; and
• suggesting that a job offer depends on an applicant opting out. For this, the Pensions Regulator could fine you between £1,000 and £5,000 (again, depending on the number of employees you have).
How to set up a pension scheme
1. Select your pension scheme: Just like choosing a personal pension, there are lots of different options on the market and some have costlier charges for employers than others, so it’s important to do some research. The scheme must be an occupational or personal pension scheme. It must be tax registered and it has to certify certain minimum requirements that may differ according to the type of scheme selected. Here, The Pensions Regulator shares their advice on picking a pension scheme that’s right for you and your staff. The link includes information on the minimum relevant requirements for each type of scheme.
The government also runs its own pension scheme called NEST (the National Employment Savings Trust). Any employer can choose to use it for some or all of their staff. It is aimed at small businesses, however, who may not have had any previous pension provisions and who tend to have far less experience of providing a pension to their staff. Nest does have its limitations, in that it currently caps total annual contributions and it cannot transfer pension rights to or from other schemes, but it also applies a low management/administration charge for employers and it is relatively straightforward for employers and employees to get started with autoenrollment online.
2. Identify which staff will be eligible for auto-enrolment. This might be a simple task if you only have one or a few employees, all of whom easily fit the profile set out at the start of this guide. If you’re not sure, however, you can find more help on the Pension Regulator’s website.
3. You must provide prescribed information about your eligible jobholders to the providers of the pension scheme, in writing and within 6 weeks of the worker first becoming entitled to be auto-enrolled. This personal information will include the name, gender, date of birth, auto-enrolment date, home address and national insurance number of the member of staff. Some pension providers will also want the worker’s work address, work email address, details of gross earnings and the value of any contributions paid by the employer and the jobholder.
4. Inform your first/new hire that they are automatically enrolled in the pension scheme (or that they can request to join if they aren’t eligible jobholders), Explain what it means for them. Provide them with any literature your pension provider has supplied for this purpose. Let them know they can opt out if they have alternative pension arrangements in place and wish to be excluded from the workplace pension scheme.
5. If you haven’t already done so, complete and your declaration of compliance online with the Pensions Regulator. There’s a handy checklist here of what you’ll need to do this. And you’ll need to re-register every three years.
6. Keep on top of your contributions and keep records of any information relating to the staff pension scheme, to stay compliant.
7. Remember to re-enrol employees every three years. This includes those who opted out: if they’re still eligible, they need again to be given the option to consider the scheme, but they can opt out again if they choose to. Also, keep an eye on your staff’s eligibility status – for example, if you hire someone now who’s 21 and is earning over £10,000 and based in the UK, you’ll need to make sure you enrol them when they turn 22.
Ensure you’re not undermining the legal safeguards for employees
There are a number of additional legal requirements of employers to also highlight.
Employers must not:
1. Ask job applicants about whether they will opt out or imply that success at interview stage might be influenced by a candidate’s opt in/out intentions
2. Induce workers, by any means, to opt out or to give up active membership of a pension scheme (e.g. by offering one-off benefits/payments to do so)
3. Deny or withhold a promotion, dismiss or otherwise unfairly treat a worker as a result of their attitude towards auto-enrolment and opting in
4. Act or omit to act in a way that removes eligible workers from a pension scheme entitlement, without providing them immediately with an appropriate alternative qualifying scheme
5. Act or omit to act in a way that renders a previously qualifying pension scheme ineligible as a qualifying scheme, without immediately providing an appropriate alternative qualifying scheme
Pensions and how the legal requirements surrounding them relate to your small business often merit a sensible discussion with an expert. If you’d like a chat, we’re here to help.
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