Between October 2012 and April 2017 all UK employers with at least one worker will be legally required to automatically enrol all eligible employees into a qualifying workplace pension scheme. The exact "staging date" for each employer is determined by number of employees at 1st April 2012, you can look up your date here.
On your staging date the employer will have to automatically deduct 1% of an employees "band earnings" and pay this into the pension scheme. At this stage the employer will also have to contribute 1% of an employees "band earnings" unless the employee "opts out".
Band earnings are those between £5,668 per annum and £41,450. There are different limits for different pay periods - weekly for example. For more details please contact us. Qualifying earnings that fall within a band of earnings are not only basic salary but other earnings including but not restricted to commission, bonuses and overtime.
Contributions will continue on this basis until April 2017 when all employers, including small ones, are expected to arrive at this same point. This period is known as the staging period.
In October 2017 employers will automatically deduct a minimum of 3% of an emplyees band earnings and will have to pay 2% themselves. This will increase again in October 2018 to 5% and 3% respectively. See table below for summary.
The idea is that from an employee’s point of view, pension enrolment and fund selection will happen automatically and thus they will not be required to make any decisions before joining their company’s chosen scheme.
To be eligible for auto-enrolment, an employee needs to be aged between 22 years and the state pension age, not currently in a qualifying pension scheme, and earning in excess of £8,105 gross a year (this figure is likely to rise year on year).
A variety of pension schemes can qualify for auto-enrolment, including: Group Personal Pensions, Stakeholder Pensions, Final Salary schemes or NEST (the Governments new pension scheme). There is no obligation to utilise NEST, however they will accept all employers on the same terms. If you have an alternative qualifying pension scheme in place, or you establish one, then you can automatically enrol employees into this.
Whichever qualifying scheme is chosen, you will ultimately have to conform to the Government's minimum contribution level which is 8% of "band earnings". This is made up of a 5% gross employee contribution and a 3% gross employer contribution. The employee will receive tax relief on their contribution meaning that under current tax rates this will have a net cost of 4%, with 1% coming via basic rate tax relief. Salary Sacrifice is also available as a way of reducing the financial impact to employers.
While it is compulsory for all eligible employees to be auto-enroled, they do have the option to leave the scheme is they wish. This process will be known as "opting out". If they choose to opt-out, there is no obligation for their employer to make contributions on their behalf. Please note that an employee will be unable to opt out until after the first contribution has been deducted from their monthly salary. This puts a further burden on the employer as they, and the scheme administrator, will then have to manage the refund of contributions for opt-outs.
Once the scheme is fully implemented employees who remain in the scheme will benefit from their employer contributing at least 3 per cent of their ‘qualifying’ earnings
Those employees aged between 16 and 21 years, over their state pension age but under 75 years, or earning less than £8,105 gross per annum do not need to be auto- enroled. These employees are categorised as non-eligible employees although they can request to join their company’s chosen pension scheme and employers will then have to make contributions on their behalf.
Low earning employees, those between the ages of 16 and 21, or over State Pension Age are known as "entitled workers". They can also request their employer to arrange a pension for them, but in this situation, the employer is not required to contribute.
Contributions can be greater than the qualifying level and employers can choose to pay more than the statutory 3%. They cannot however pay less.
How this affects UK employers
The transition from a situation where most people do not join pension schemes, to one where they will be automatically enrolled into one, will almost certainly result in increased pension membership.
Consequently, any business that is currently without a pension scheme will need to plan for a significant increase in costs – in terms of the financial contributions to be made, but also the costs involved in communication and administration.
It is likely that companies who already do contribute to a pension scheme will also see an increase in costs, as a result of increased pension membership.
Pension auto-enrolment Contribution Phasing Summary
||Employee Pays **
|From staging date to 1st October 2017
|from 1st October 2017
|From 1st October 2018
** less tax relief
The staging process will not apply to those companies who already have a defined benefit or hybrid scheme. It is proposed that these schemes will be brought into the legislation at the end of the staging period.
Please contact us to arrange a FREE initial chat with one of our specialists to see how we may be able to work with you to manage the challenges of pension auto-enrolment and Workplace and NEST pensions.