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Automatic enrolment has made workplace pensions a world of pain for many businesses, especially smaller ones who don’t have the resources in house to keep up with the latest news and regulations. Read on for a breakdown of what auto enrolment means for your business and how we can help.
Auto enrolment for pensions was first introduced in 2012 because of growing concerns that more and more people would be facing poverty in old age. Since October 2012, take up has increased considerably – in 2015 more than six in 10 workers were signed up, marking the highest number since 1997.
While now over eight million people are benefiting, employers themselves have obligations regarding workplace pensions, and small businesses must ensure that they are fully compliant with current regulations.
Pensions are there to help people, but to do this requires that their employers fulfil certain legal duties. All employers must provide their workers a workplace pension scheme, and must contribute towards it.
As part of our business accounting services serving SMEs in Burnley and Lancashire, we’re here to offer you our assistance and guidance about workplace pensions, to ensure your business is up to date with the very latest changes in pensions legislation.
How Automatic Enrolment Works
All employers must offer pensions to anyone over the age of 22 and who earns more than £10,000 a year.
Providing workplace pensions for employers is known as automatic enrolment – the employer automatically signs the employee up for the pension scheme, unless they choose individually to opt out.
This applies to every employer with at least one member of staff, if the employee meets the criteria.
All employers will have to start the process of automatic enrolment by 2018. There are a series of staging dates, which indicate when employers must begin this process, following it becoming law in 2012.
You may be unsure if you are an employer – this isn’t as daft as it sounds, because certain businesses may involve people working on their behalf, such as freelancers, who are not classified as employees.
If you pay someone on a regular basis for the time they work, rather than for a specific job, and they are entitled to benefits such as sick pay, then they are an employee. This is different to someone who you employ through an agency, or who is self-employed.
Employees can opt out if they choose. However, if they do, they lose out on the proportion their employer would contribute to their pension, and government tax relief.
Opting out involves completing a form and sending it to the employer, not to the people running the pension scheme. If this opt out occurs before the end of the first month of enrolment, the employee is entitled to get back any money they have paid in.
Employees can also opt back in at any time by writing to their employer. Employers must also automatically re-enrol employees back into the scheme every three years, informing them in advance in writing that this will be happening.
The onus is then on the employee to opt out again, should they want to.
Who Pays What?
Employers, when setting up a pension scheme, or if they already have one, must ensure it meets the auto enrolment rules
Under the auto enrolment scheme, the employer must also contribute to the pension. This figure is at least 1% of the employee’s qualifying earnings.
Qualifying earnings means either a figure between £5,846 and £45,000 before tax; or the employee’s entire salary before tax.
Currently, the total minimum pension contribution for an employee is 2% of their earnings – 0.8% from the employee, 0.2% tax relief, and 1% from the employer.
This 1% contribution is due to rise to a proposed 3% in 2019.
It’s the employer’s duty to deduct pension contributions from their staff’s pay each month, and to ensure they pay them into their employees’ workplace pension scheme by the 22nd day of each month – or the 19th day if paying by cheque.
A word of warning: the Pensions Regulator can fine you if you pay these contributions late, or if you fail to pay the minimum contribution for each person you employ.
The Pros and Cons
The Pros, for the employee, are that automatic enrolment helps ensure they have money to live off when they retire, and they won’t be affected by changes to the State Pension. They will also find that their pension will follow them, should they decide to change jobs.
It’s kept affordable because the contributions are relative to the salary they earn, and their employer also contributes. There’s also some relief provided by HMRC, albeit small.
The cons are that it slightly reduces take-home pay, and employees may have to factor it in to reduced future pay rises – if the employer needs to find ways of paying for it they may not feel as generous as they once did.
Also, as mentioned earlier, should the employee opt out, they will find themselves automatically opted back in in three years, which could mean having to repeat the process.
For the employer, there’s obviously a certain administrative burden involved, and a need to be up to date with any changes to stay on the right side of compliance with the latest regulations.
You may also need to set up a pension scheme if you don’t already have one; or you may need to find a new one if your current pension scheme doesn’t meet the criteria – you will need to check its terms and conditions.
The pension scheme you choose must be suitable for you and your staff, and it must be able to work with your payroll system. You’ll also want to consider the cost implications of the scheme you choose.
The Good News
This is that we can help. You don’t have to feel bamboozled, or even overwhelmed, by the whole pensions issue. We’re here to offer you sound, practical, and, vitally, easily understood advice on all aspects of pensions compliance, automatic enrolment and the latest changes to the rules and regulations.
Get In Touch
For business accounting services in Burnley, Lancashire and across the North West, please get in touch. We’re ready to talk to you. Give us a call on 01282 902456, email firstname.lastname@example.org or visit the contact page on our website and fill in the contact form – we’ll reply as soon as we can.