Pension Auto Enrolment
Pension auto enrolment is just one of the many new challenges faced by small businesses recently.
What is automatic enrolment?
Automatic enrolment is a legal requirement and places a duty on employers to automatically enrol ‘workers’ into a work based pension scheme.
Who counts as an Employee?
Automatic enrolment is required for any employee who:
- is aged between 22 years and the State Pension Age
- earning over the minimum earnings threshold (currently £10,000)
- working in the UK
- not already in a qualifying pension scheme
Main Duties of an Employer
The main duties of an employer are to:
- assess the types of workers in the business
- provide a qualifying automatic enrolment pension scheme for the relevant workers. This is a scheme that the employer chooses and the employee cannot ask for a different scheme to be in place.
- write to most of their workers to explain what automatic enrolment into a workplace pension means for them
- automatically enrol all ‘eligible jobholders’ into the scheme and pay employer contributions
- complete the declaration of compliance and keep suitable records.
Workers categorised as non-eligible jobholders during the assessment process still may have the right to ‘opt in’ (i.e. join a scheme) and should therefore be treated as eligible jobholders.
Workers categorised as entitled workers are also entitled to join the scheme but in these cases there is no requirement on the employer to make employer contributions in respect of these workers.
Specifically any letters sent by the employer to the employee must not encourage the employee to opt out. The final decision must always be made by the employee.
Employers have to make contributions to the pension scheme for eligible jobholders.
All businesses will need to contribute at least 3% on the ‘qualifying pensionable earnings’ for eligible jobholders.
There will also be a total minimum contribution which will need to be paid by employees if the employer does not meet the total minimum contribution. If the employer only pays the employer’s minimum contribution, employees’ contributions started at 1% of their salary, and will eventually rise 4%. An additional 1% in the form of tax relief will mean that there is a minimum 8% contribution rate.
What are qualifying pensionable earnings?
Earnings cover cash elements of pay including overtime and bonuses (gross) but minimum contributions are not calculated on all the earnings.
Contributions are payable on earnings between the lower and higher thresholds of £6,032 and £46,350 for 2018/19. The earnings between these amounts are 'qualifying earnings'.
Employers Ongoing Duties
Many small businesses who are also employers don't realise that they have ongoing duties to comply with continually even after their initial staging date.
The main duty that we find small businesses often aren't aware of is Re-enrolment.
This regulation requires employers to re-enrol certain employees back into an automatic pension scheme every three years.
The process involves reassessing the workforce and re-enrolling certain employees into their chosen qualifying automatic pension scheme.
Employers are also required to complete the re-declaration of compliance with The Pension Regulator even if they do not have any staff to re-enrol.
Re-enrolment and re-declaration is a legal requirement and failure to comply may result in a fine.
Employers who fail to comply with their legal duties can be fined.
The Pension Regulator has a range of powers it can use, from warning letters and statutory notices to financial penalties.
Fines range from a £400 fixed penalty, to a varying daily escalating penalty of between £50 and £10,000, depending on the number of employees.
In some serious cases the Regulator can also seek a criminal prosecution.
There are proposals in place to change the lower age limit for auto enrolment from 22 to 18.
The government is also proposing to remove the lower threshold for qualifying pensionable earnings (£6,032 in 2018/19). Under these plans, employers and employees would make contributions from £1 of earnings rather than from the lower threshold.
The government currently plans to implement these proposals in the mid-2020s.