Guide for Employers on Auto-enrolment of Pensions

Pensions auto enrolment (AE) is a government initiative designed to help employees save for retirement in a tax-efficient way, reduce reliance on the State Pension, and ensure employers fulfill their obligations by enrolling eligible employees into a workplace pension scheme and making contributions.

To navigate the complex rules of auto enrolment, businesses need to address several key questions:

1. When do my pensions auto enrolment obligations begin and what do I need to do?
– If your company existed before October 1, 2017, you would have been assigned a “staging date” by The Pensions Regulator, marking the start of your auto enrolment duties.
– For companies formed on or after October 1, 2017, your duties start on the day you hire your first employee.
– In summary, companies must have a pension scheme, assess the eligibility of their workforce, automatically enroll eligible employees, communicate with employees, re-enroll opt-outs every three years, maintain records, and complete a declaration of compliance.

2. Which of my employees do I need to automatically enrol?
– There are three categories of employees for auto enrolment purposes:
a. Eligible jobholders (type 1 worker) – Employees aged 22 to State Pension age, earning over £10,000 a year, must be auto-enrolled.
b. Non-eligible jobholders (type 2 worker) – Earn over £6,240 but less than £10,000 per year, or earn over £10,000 per year but are younger than 22 or older than State Pension age. They have the right to opt into the scheme.
c. Entitled workers (type 3 worker) – Earn less than £6,240 per year. They can opt into the scheme, but there is no obligation for the employer to make contributions.

3. What contributions do I need to pay?
– Contributions depend on how pensionable pay is calculated.
– The minimum requirement is for contributions to be paid on earnings between £6,240 and £50,270 for the tax year 2023/24 (qualifying earnings).
– The current total minimum contribution rate is 8%, with employers paying a minimum of 3% and employees paying 5%.
– Employers can pay more than the minimum, reducing the employee’s contribution, but a certificate confirming the basis of the scheme’s contributions and meeting minimum levels is required.

4. What if an employee doesn’t want to join the pension scheme?
– Employees have the right to opt out within 30 days of auto enrolment and can receive a refund on any employee contributions made during that period.
– Employees can stop contributions at any time after the opt-out period, but refunds on previous contributions are not available.
– Employers cannot encourage employees to opt out, as doing so incurs significant financial penalties.

5. What is the tax position on pension contributions?
– Employer contributions are tax-deductible, reducing profits for corporation tax purposes.
– Employee contributions qualify for tax relief, with the method depending on the pension provider.
– Net pay arrangement deducts contributions from gross pay, providing full tax relief upfront.
– Relief at source arrangement deducts contributions from net pay, with the provider adding 20% tax relief. Higher rate taxpayers may claim additional relief from HMRC.

6. Which pension provider should I choose for my scheme?
– Consider factors like charges, service quality, investment options, and communications support when choosing a pension provider.
– Charges should encompass the provider’s annual management charge and any upfront or ongoing fees.
– Service quality is important to ensure smooth administration and avoid issues.
– Investment options should be evaluated, especially the default investment fund.
– Communications support is crucial for timely and compliant employee communication.

7. Once I’ve set up a pension scheme and started auto enrolling employees, is there nothing further to do?
– Auto enrolment is an ongoing process that requires continued attention and compliance.
– Employers must keep up with changes in legislation, contribute to the pension scheme, regularly assess eligibility, communicate with employees, and fulfill re-enrollment requirements every three years.

In conclusion, managing auto enrolment obligations requires understanding key questions, staying compliant, and choosing the right pension provider. It’s important to continually assess and address your responsibilities to ensure a smooth auto enrolment process.