This article is a brief overview of Automatic Enrolment for Pensions.
What is automatic enrolment?
It has long been recognised that most people are not saving enough for retirement and, as a result may not be able to afford to live comfortably in their retirement on just the State Pension. As people are also living longer, there is increasing strain on the State benefits system, so private pension provision is becoming increasingly important.
To encourage individuals to start building up retirement benefits, the Government introduced pension reforms through the Pensions Act 2008 that requires all employers to offer workplace pension schemes and to enrol eligible workers into their schemes.
Every employer with at least one member of staff now has new duties, including enrolling those who are eligible into a workplace pension scheme and contributing towards it.
An employee is eligible if they:
- are aged between 22 and State Pension age
- earn more than £10,000 a year
- work in the UK
This is called ‘automatic enrolment’ because it is automatic for staff – they don’t have to do anything to be enrolled into a pension scheme, but it is not automatic for employers. Under the law introduced in 2012, all employers must eventually offer a workplace pension scheme and automatically enrol eligible workers in it. This requirement has applied to larger employers since October 2012 and all other employers since 2018.
Are all employers an employer for the purposes of automatic enrolment?
No, not all employers are. But it is assumed that they are, so it is important to notify the pension regulator if you are not.
You will not be an employer for the purposes of automatic enrolment for the following reasons
- there is only one director and there are no other staff working for the company
- the only people working for the company are directors and none of them has an employment contract
- the company has ceased trading
What is an employment contract?
All employees have an employment contract with their employer. A contract is an agreement that sets out an employee’s:
- employment conditions
- rights
- responsibilities
- duties
These are called the ‘terms’ of the contract.
Employees and employers must stick to a contract until it ends (eg by an employer or employee giving notice or an employee being dismissed) or until the terms are changed (usually by agreement between the employee and employer).
As soon as someone accepts a job offer they have a contract with their employer. An employment contract doesn’t have to be written down.
IMPORTANT
Under automatic enrolment the pension contributions are made through payroll – which means that the employee contributions are deducted from the gross salary (and then paid to the pension provider, along with the employer contributions).
The contribution amount is also calculated as a percentage of your gross salary (Which could be set low for tax planning purposes). For contractors this approach requires more consideration (to work out the % of contribution required by the employee and employer to reach your desired monthly contribution) and it is also somewhat limiting.
It is important that you know that opting out of automatic enrolment does not affect the ability of your limited company to make pension contributions into your pension pot – you can still do this, and all pension contributions made by your limited company will be tax deductible for corporation tax purposes.
With this option, you just need to decide how much the company will contribute to your pot each month, and set this up with your pension provider.
To understand the requirements on Employers for the purposes of Auto Enrolment take a look at Employer for the Purpose of Automatic Enrolment.
See our Declaration of Compliance guide here to help you through the declaration process.