1. Workplace Pensions And Auto Enrolment
What is Auto Enrolment?
Auto Enrolment is a government initiative and requires every employer of staff normally working in the UK to put their qualifying staff into a workplace pension scheme and to make contributions towards their employee's pension.
What is a Workplace Pension Scheme?
A workplace pension is a savings plan that's arranged by your employer to help you put money aside for later in life. It is also known as an occupational pension or a work-based pension. Typically, the employer will also contribute to the pension scheme for you, and so will the government in the form of tax relief.
When was Auto Enrolment introduced?
Auto Enrolment was introduced under the Pensions Act 2008 and the first (larger) companies automatically enrolled in 2012.
Why was Auto Enrolment introduced?
The UK government found too few workers were putting money into a pension and were therefore not having enough to live on during their retirement. They decided to introduce new laws requiring that all U.K. employers put their qualifying employees into workplace pension schemes by a given deadline also known as "staging date".
When does Auto Enrolment start?
Auto Enrolment started in October 2012 for larger companies with 250 or more employees. Currently, small businesses with fewer than 30 employees are going through the auto enrolment process. For more information on upcoming staging dates, please head over to our Deadline and Staging Dates for Workplace Pensions page.
2. Staging Date
When is my Auto Enrolment deadline or "staging date"?
It depends. Employers with more employees will have an earlier staging date than those with fewer. As mentioned above, larger companies with 250 plus employees had staging dates beginning in October 2012. Smaller businesses with fewer than 30 employees or incorporated after April 2012 will have a staging date of November 2015 to April 2017 depending on their PAYE reference.
How do you find out what your staging date is?
To find out your auto enrolment staging date, you'll need the PAYE reference from your largest payroll. You can find your PAYE Reference on letters you will have received from The Pensions Regulator informing you about automatic enrolment. It can also be found on the letter from HMRC which you will have been sent after registering as an employer or from your payroll software package.
With your PAYE reference, you can head over to The Pensions Regulator's site to find out your staging date.
3. Contributions And Qualifying Earnings
How does Auto Enrolment work?
Employers must 'auto-enrol' their qualifying employees in the workplace pension. Qualifying employees are those that:
- are aged between 22 and State Pension age
- earn more than £10,000 a year
- work in the UK
Employees will contribute a set percentage of their pay into the pension. The employer, along with the government, will also contribute a set percentage to the employee's pension pot.
What are Auto Enrolment contributions?
Initially, employees must contribute 1% of their pre tax pay to the pension. Their employer and the Government will then top that up by 1%. The total pension contribution will equate to 2.0% of the employee's salary.
By early 2019, the employer's contribution will increase to 3.0%, the employee's up to 4.0% and the government's top up 1.0%. The total pension contribution will equate to 8.0% of the employee's salary.
For more details on auto enrolment contributions including when you have to pay, please visit our The Employer's Guide To Auto Enrolment Contributions.
What is Auto Enrolment qualifying earnings?
Qualified earnings are earnings that are between £5,824 and £43,000*, and that are made up of any of the following components that are due to be paid to the employee;
- Statutory sick pay
- Statutory maternity pay
- Ordinary or additional statutory paternity pay
- Statutory adoption pay
Expenses such as food, travel or car allowance are not considered to form part of an employee's qualifying earnings.
The employer is responsible for assessing whether a component of pay constitutes an element of qualifying earnings. Employers make contributions to an employee's pension fund based on a percentage of the employee's qualified earnings (assuming the employee is not an entitled worker). The employer is under no obligation to contribute to the employee's pension fund for any earnings above the qualified earnings threshold of £43,000*
For more information on Qualifying Earnings , please visit our Employee Classifications & Qualifying Earnings page.
What will Auto Enrolment cost employers?
The cost of auto enrolment for employers will depend on which provider the employer chooses to sign up with. With Smart Pension, auto enrolment is free for employers so they don't pay a single penny. There are no set up costs, no on-going annual costs or per employee costs or any other cost for that matter. For more information on our fees and charges, please visit this page. To see how Smart Pension compares to the other big auto enrolment provider in terms of fees, check out our Fee, Costs & Key Pension Attributes Comparison table.
What will Auto Enrolment cost employees?
Again, the cost of auto enrolment will depend on which provider the employer has chosen for its employees. At Smart Pension, we charge employees a small monthly "Assets Under Administration" fee of 0.75% per annum of funds under administration. There are no “transaction” fees or other hidden charges. This is in line with the UK fee cap that has been applied since April 2015 ( see page 40 here ). Please click here to see how we are great value for employees compared to the main pension providers in the market. If you would like to see how we are great value for employees over the longer term too, please see our detailed worksheet here.
5. Eligibility And Exemptions
Who qualifies or is eligible for Auto Enrolment?
Employers will need to assess the workforce to identify which category their employees fall into. There are three categories:
- Eligible Jobholder
- Non-eligible Jobholder
- Entitled Jobholder
These categories are based on age and earnings and the employer will have different duties and obligations for each employee depending upon their classification.
Those that fall into the Eligible Jobholder category (aged between 22 and the State Pension age, earns over £10,000 a year and works in the UK) will be automatically enrolled into the workplace pension. They can choose to opt out but if they choose to do nothing, they will be automatically enrolled.
Those that fall into the Non-eligible Jobholder category are either those that:
- Fall outside of the required age bracket i.e. ages between 16-21 or between the State Pension age - 74 and who earns above the auto enrolment earnings trigger of £10,000.
- Are aged between 16-74 and earn above £5,824 (the lower earnings level for qualifying earnings) but below £10,000 the auto enrolment earnings trigger*.
Although the employer is not required to automatically enrol non-eligible jobholders into the pension scheme, these workers have a right to opt in and should they choose to do so, the employer is obliged to make contributions to their pension pot.
Those that are classed as Entitled Jobholders, aged between 16-74 but earns less than the lower earnings level for qualifying earnings, have a right to also join the workplace pension. However, the employer is not obliged to automatically enrol them into the pension scheme nor are they required to make any contributions to the pension pot. Entitled Jobholders who ask to join a pension scheme do not have opt-out rights.
* These figures are for the 2016–2017 tax year.
For more information, please refer to our Employee Classifications & Qualifying Earnings page.
Who is exempt from Auto Enrolment?
A company can be exempt from auto enrolment duties if it is comprised only of directors. In this situation, you are not legally required to operate an auto enrolment workplace pension scheme. The following are reasons why a company may be exempt from auto enrolment duties by reason of Director Exemption:
- 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 have an employment contract.
- The only people working for the company are directors and only one of them has an employment contract.
- The company does not or no longer employs any staff because it has ceased trading/is terminally insolvent e.g. has gone into liquidation/has been dissolved.
For more information on auto enrolment exemptions, head over to our Employer Information page.
What is Auto Enrolment postponement?
Sometimes referred to as 'waiting period', postponement of automatic enrolment is the deferment of auto enrolment duties. Employers can postpone auto enrolment for a period of up to three months from specific dates, however they can only do so at specific times and must also give notice to employees.
Example: If an employer has a staging date of 30th April and wishes to postpone their staging date they have 3 months from the 30th April. This would mean that the latest the employer would be able to postpone to is 30th July.
Why postpone Auto Enrolment?
Employers may wish to postpone their auto enrolment duties to give them some flexibility when it comes to aligning their new duties with existing business and payroll processes. For example, postponement can be used to help with the administration of a large number of new joiners to a pension scheme by staggering the employer's auto enrolment duties over a three month period.
How to postpone Auto Enrolment and when?
The employer must notify their employees of postponement. The deadline for issuing the postponement notice is six weeks and a day from which they wish to use postponement. If the notice is not issued, postponement cannot be applied.
An employer can only postpone automatic enrolment from:
- their staging date
- a staff member's first day of employment
- the date a staff member first becomes eligible for automatic enrolment
If an employer postpones from their staging date, it doesn't change their staging date and they still have duties including the obligation to write to the staff who will be postponed, and inform them of the deferment within six weeks of their staging date.
Does postponing Auto Enrolment change my deadline for the Declaration of Compliance?
Irrespective of whether an employer has postponed auto enrolment or not, all employers are required to submit their declaration of compliance to the Pensions Regulator within five months of their staging date.
Can an employee opt-in during a postponement period?
An employee has the right to opt-in during the postponement period. An employer is required to check the level of qualifying earnings of the worker to determine whether the worker is a jobholder or entitled worker and make contributions to the employee's pension.
7. Opting Out
Can an employee opt out?
Leaving the scheme after being automatically enrolled is known as opting out. An employee can decide to leave their workplace pension scheme at any time. Employers must not encourage or force employees to opt out.
If you are considering opting out, our short article highlights the few things to consider before you do.
What is the Opt Out Period?
You have 30 days from being auto enrolled to opt out and any contributions that you made to the pension must be repaid to you.
What if a member chooses to opt out/leave after the 30 days Opt Out period?
A jobholder's right to choose to opt out expires at the end of the opt-out period. They cannot opt out after the 30 day opt-out period so if they wish to leave the scheme, they are required to cease active membership in accordance with the schemes rules. This is known as 'ceasing membership' and these members are known as 'leavers'. Members may not be able to get back any payments they have made depending on the pension scheme's rules. Usually payments will stay in the pension pot until the member chooses to open it to take an income.
Whilst opting out during the 30 day Opt Out period means that membership is cancelled altogether and deemed never to exist, membership can be preserved if members choose to leave the scheme after the Opt Out period. Should these members later wish to contribute towards their scheme, they can choose to re-join.
Entitled workers who request to join a pension scheme do not have opt-out rights. They must cease active membership should they wish to leave and if they later choose to contribute to the scheme, they have to opt-in once more. However, the employer has the right to reject their request to re-join.
How do you opt out?
Your employer will let you know how to opt out if you have been enrolled. If you have been enrolled with Smart Pension, you can easily opt out online in a couple of clicks.
To find out more about opting out, head over to our Employee Information page.
8. Declaration of Compliance
What is the Declaration of Compliance?
A declaration of compliance is an employer's legal responsibility and is used to inform the Pensions Regulator of what has been done to comply with an employer's automatic enrolment duties. All employers are required to submit this declaration to the Pensions Regulator within five months of their staging date regardless of whether they have postponed auto enrolment or not. Auto enrolment duties are considered incomplete until a declaration has been submitted and received.