Automatic enrolment. What is it…?
Automatic enrolment (AE) is a change to UK pension law. It means that if you employ at least one person you have legal obligations to enrol certain members of staff into a pension scheme. It also means your business needs to contribute toward the pension.
If you employ anybody who is:
- aged between 22 and up to state pension age
- and earns more than £833 per month (£192 per week)
Then you are an employer who needs to provide a pension. No ifs and no buts…
The Pensions Regulator is currently contacting all UK businesses and giving them a staging date. This is the date when the law comes into effect for you. The staging date will vary from business to business and isn’t the same for everyone. It depends on several factors such as when your company started or incorporated, and how many employees you have. If you’re in doubt – check the Pensions Regulator website and enter your PAYE reference. This will tell you when you need to be ready.
…and why should I care?
AE is compulsory. And you’ll receive penalties and fines if you fail to make the arrangements. It’s important to note that this is completely different to the stakeholder pension. Under that scheme you only needed to comply if you had five or more members on your team. It also wasn’t contribution based. And, as the name suggests, everyone who is eligible will be automatically enrolled on to this new scheme (in the past the onus was on the individual to opt in).
The regulator recommends that you give yourself 18 months to prepare for AE. It’s tempting to put this at the bottom of your list. And we can’t blame you – it’s not an insignificant exercise! But as soon as you receive your staging date you should start to get ready.
Steps you need to take
Here are the steps you should make when you get your staging date. We’ll explain a little more about some of them later.
- Confirm the point of contact at your business
- Choose a pension scheme
- Work out who to put in the scheme
- Write to your staff
- Declare your compliance (via an online form to confirm how you’ve met your legal duties)
Choose your pension scheme
Your accountant or business advisor can help with the compliance side of things. They can give you guidance on the general pension scheme set-up – how to operate it through your payroll, for example. They can also help you with uploading and managing the figures to the pension scheme itself.
However, if your accountant is not registered with the FSA, they can’t tell you which pension scheme to choose but they’ll be able to give you guidance on your options relating to the government scheme NEST pension and other Auto Enrolment pension providers.
How we suggest you choose your scheme
In this instance we often refer clients to a small selection of Independent Financial Advisers (IFAs). We use our understanding of your business to suggest two or three relevant IFAs for you to meet. You can select the IFA and the product you like. And then we can make a joint decision between the three parties: you, the financial advisor and us. This way we can decide who is going to be responsible for what and make sure you’re covered.
Of course, you can do the research yourself. But it’s time consuming process and there are hundreds of products on the market. So if you’re looking for a pension different to those offered by the government it might be sensible to speak to a specialist and let them do the searching for you.
As mentioned, everyone in your company will be automatically enrolled. Each individual can then stay in the scheme or opt out. For every employee who remains in the scheme, you’ll need to make additional contributions on top of those paid by the employee. Here’s an example of the minimum contributions you’ll need to pay.
|Example date||Employee minimum contribution||Total minimum contribution|
|Employer’s staging date to 05/04/18||1%||2% (including 1% staff contribution)|
|06/04/18 — 05/04/19||3%||5% (including 3% staff contribution)|
|06/04/19 onwards||5%||8% (including 5% staff contribution)|
And don’t forget – you need to pay your contributions to your staff pension scheme on time. This includes calculating and deducting contributions from your staff’s salaries. You’ll also need to agree the due dates for paying contributions to the scheme with your trustee or provider.
Inheritance planning and the NEST scheme
NEST is a pension scheme that’s been set up by the government especially for auto enrolment. It’s aimed at being a simple solution that will suit lots of members from the 22-62 age range in most businesses. However, you aren’t able to write this pension scheme into a trust.
This means that the NEST pension will automatically revert to your estate in the event of your death. This is a particular issue if your inheritance planning includes a pension you’d like to allocate to a specific person or cause outside of your estate. This is a little bizarre! So if you want this pension to remain separate from your estate, be sure to check with your adviser that you select the right product for your personal circumstances.
If you’d like to find out more about how you can plan for inheritance tax you can check our blog here. Or to have a chat about how your pension can fit into your retirement or inheritance planning give us a call on 020 8238 8730.
And a final note on pension tax relief for your lower and higher paid staff
There are two ways that your staff can get tax relief on what they pay into their pension scheme. These are commonly known as ‘relief at source’ and ‘net pay arrangements’. If the scheme you choose uses relief at source the scheme provider will claim the tax relief from HM Revenue & Customs. However – if the scheme uses net pay arrangements you will need to calculate tax on the pay that is left after your staff have paid into the pension.
The NEST scheme uses relief at source. This will affect your lower and higher paid staff in different ways.
Staff who don’t pay income tax
These staff members will only get tax relief if your scheme uses relief at source. So if you choose the NEST scheme your staff will get tax relief. However, if your business uses salary sacrifice to manage pension contributions, staff who don’t pay income tax won’t get this relief (irrespective of the method your pension scheme uses).
Staff who pay tax
These staff members will get tax relief whichever scheme they use. But because the NEST scheme uses relief at source this affects your higher and additional rate taxpayers slightly differently. In order for them to benefit from the full tax relief they will have to complete an additional tax self-assessment to claim their full tax relief.
This is something to consider when choosing your scheme. If you’re a higher rate tax payer and you’d like some more information about claiming this relief on your tax return get in touch .
This can be a big undertaking for your business. But don’t panic! The best advice is to take immediate action once you’ve received your staging date. Allocate the right resource in your company and make sure you follow the process. And if you’re in doubt about the right product or the solution for you then speak to your business or financial adviser. Together you’ll successfully navigate the workplace pensions minefield…
And we can help! Give me a call on 020 8238 8730 or send an email if you’re worried about what automatic enrolment means for your business – I’m very happy to talk though any questions you might have.