Pension auto-enrolment – what business owners need to know

In the UK, 1.8 million small business owners will have to offer an pension auto-enrolment scheme for employees

Have you heard about pension auto-enrolment? Chances are, if you’re an employer in the UK you have. If you are one of the 1.8 million UK small and micro business employers who need to offer an auto-enrolment scheme, here’s what you need to know:

What does auto-enrolment mean?

Automatic enrolment means most UK employers will be obliged to put in place a qualifying workplace pension scheme and automatically enrol their qualifying workers. Employers then have to make contributions to their workers’ pensions every pay period.

When will I be affected?

The size of your business determines when you have to enrol your employees into a workplace pension scheme. This is called your staging date.

Very large employers were the first to reach their staging date in late 2012. It’s now the turn of small and micro employers.

The Pensions Regulator should write to you regularly to confirm your staging date. You can also check ahead of schedule on The Pension Regulator’s website. All you need is your PAYE reference number.

Who do I need to enrol?

Workers fit into one of three groups: eligible, entitled and non-eligible. A worker assessment will help you identify which group each of your employees fits into.

Eligible workers must be automatically enrolled and you must pay minimum contributions. They are those who:

  • Aren’t already in a qualifying pension scheme at work.
  • Are aged between 22 and the state pension age (the earliest age they can claim their state pension).
  • Work in the UK.
  • 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 and if they do, you must pay minimum contributions. These are UK workers who are either:

  • Aged between 16 and 22 or between state pension age and 74 and earn more than £10,000 in a year, or
  • Are aged between 16 and 74 and earn at least £5,824 but less than £10,000.

Entitled workers can also ask to join, although you don’t have to pay contributions for this group. Entitled workers are those aged at least 16 but under 75 who earn less than £5,824.

How much do I have to contribute?

The government has set minimum standards that employers must meet. For most employers, this means paying minimum contributions, which will start at 1% of a worker’s “qualifying earnings” and increase to 3% over the next few years. When you contribute, so do your employees.

It’s important to remember that “qualifying earnings” does not mean all of an employee’s salary, but applies to earnings over a minimum amount (currently £5,824) up to a maximum (currently £42,385). These figures apply to the 2015/16 tax year and will be reviewed every year by the government.

So for example, for someone earning £18,000 a year, the minimum percentages are calculated on the difference between £5,824 and £18,000, which is £12,176.

Of course, as an employer you can contribute more than the statutory minimum. The minimum contribution levels are intended to set a foundation for building the savings habit.

So far, most workers have chosen to stay enrolled in their workplace pension. However, they have the right to opt out, and opt-out rates currently average

It is illegal to force or try to force a worker to opt out , and employers can be fined by the regulator for doing so. This means, for example, that you can’t offer a pay rise for opting out, or threaten a pay cut for staying in the scheme.

If a member opts out – which should be done within one month of being enrolled – you must pay back any contributions taken from their pay and the pensions scheme will refund any contributions you’ve made.

After the one month opt-out period is over, members can’t opt out and get a refund, but they can stop contributing. If they do, contributions already paid, including those from their employer, will remain invested in the pension scheme.

How do I choose the right pension scheme?

Choosing the right qualifying scheme for your workers is an important decision. You might want to consider criteria such as the scheme’s investment approach, whether it uses clear language to communicate, and how easy it is to administer.

A good place to start exploring what schemes are right for you is to look at schemes recommended by The Pensions Regulator or complete the online enquiry form and we will do our very best to help you.