Workplace Pensions – Auto Enrolment

By Caroline Ruscoe CTA, ATT, Tax Business Advisor.

What is Automatic-Enrolment?

The law on workplace pensions has changed, from the date allocated to the employers PAYE reference (known as the staging date) all employers with at least one member of staff have duties to comply with and report to The Pensions Regulator. This date is driven by the number of directors/employees on the payroll at 1st April 2012. The staging date will be allocated on set up to schemes set up after this date.

First Step – preparation

The first step is to be aware of the staging date. If the staging date is not known it is on The Pensions Regulator website: www.tpr.gov.uk/staging-date, the PAYE reference will need to be entered. More help and advice, as well as detailed guidance, can also be found at this site.

Developing initial plans is essential as a qualifying scheme must be in place such that staff can be enrolled from the staging date, and it can take up to a year to prepare for this. Eligible staff can then opt out but it is against the law to take any action to induce anyone to opt out. Not all schemes are qualifying and not all schemes will accept all employees for auto-enrolment purposes. However, if this proves problematic, the government has designed a scheme – the National Employment Savings Trust (NEST) to will accept all employees but there are currently other providers available.

Next Step ­ assessment of the workforce

All ‘workers’ (defined as those working under a contract of employment or who have a contract to perform services personally and are not undertaking the work as part of their own business) must be assessed for eligibility and can fall into one of 3 categories, see below:

Type of Worker Definition ­ (note earnings thresholds are reviewed annually, 2014/15 rates are shown here) Effect of Auto-Enrolment
Entitled workers Aged 16-74, working in the UK and earning below £5,772 Have a right to join (no requirement for employer contributions to be paid)
Eligible jobholders Aged 22-State Pension Age, work in the UK and earn above £10,000 Must be Auto-enrolled (Employer contributions must be paid)
Non-eligible jobholders Aged 16-21 or State Pension Age to 74, work in the UK and earn over £10,000 or Aged 16-74, work in the UK and earn over £5,772 but below £10,000 Have a right to opt-in (Employer contributions must be paid)

Whilst all employers must assess their workforce, all employees may not have to be automatically enrolled.

It is the employer’s legal responsibility to comply with The Pensions Regulators requirements and fines will be levied for non-compliance. It is a misconception that auto-enrolment is a payroll function, whilst the payroll will help keep track of ages and earnings; and pension deductions can be processed through the payroll, liaison is still required between the employer and the pension company. There are a number of providers who have designed software to deal with this aspect of auto-enrolment.

Contribution Levels

The government has set minimum contribution levels that must be paid by both the employer and the workforce. The contribution percentages are based on ‘qualifying earnings’ that fall between the lower and upper limits set by the government. These are defined as earnings from employment before Tax and National Insurance. The most common elements are those that make up gross pay: wages or salary; commission; bonuses etc.

The table below shows the graduated introduction of these rates if the employer decides to base the contributions on qualifying earnings:

From staging date until

Employer pays

%

Employee pays

%

Tax relief added

%

Total Contribution

%

September 2017

1.0

0.8

0.2

2.0

September 2018

2.0

2.4

0.6

5.0

October 2018 on

3.0

4.0

1.0

8.0

The employer may decide to use another basis to calculate pensionable pay, being basic earnings only or full earnings. In any event the total contributions rise to between 7% and 9% depending on the basis used by October 2018.

Notifications

The employer is required to notify the workforce that they are being auto-enrolled up to 6 weeks before the staging date. The workforce are able to opt out at any time but if they do this, they must be re-enrolled and go through the opt out process again every 3 years.

A declaration of compliance is required to be filed 5 months from the original staging date.

Small companies with directors only

The practicality of applying auto-enrolment to small employer companies has caused much discussion. The answers lie in the legal definition of a ‘worker’ as defined above under Next Step.

This definition caused similar issues when the National Minimum Wage (NMW) was introduced in 1999, and at that time, the Department of Trade and Industry stated that they would not seek to imply a contract of service where there was none, for the purpose of applying the NMW.  In a similar way, The Pensions Regulator has confirmed that they will take the same view.

Single director companies with no workers are exempt and there is a simple process to go through to update the Pensions Regulator’s records to confirm this and stop them sending further correspondence. If there are two or more directors in an employer company, both with no contract of service and no other ‘workers’ both directors are exempt. If however, there are two or more directors, at least one has a contract of service and there are other workers employed in the company, then auto-enrolment applies to that company.

Summary

  • Know your staging date.
  • Consider what type of scheme suits both the employer and it’s workers best and get it in place well in advance of your staging date and note the reporting requirements above.
  • Consider the practicality of how you are going to administer the pension scheme and how it will interface with your payroll to avoid future fines by the Pensions Regulator for non-compliance.
  • If the employer is small with directors only who may be categorised as workers, consider the legal definition of worker and whether it applies to those directors.

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