Automatic Enrolment and how it affects small businesses

03 Jun 2016 | Research & Business Knowledge

If you employ someone and do not currently offer a pension scheme auto enrolment will affect you.  Act now.

Under a law introduced in 2012 (part of the 2008 Pensions Act) all employers must eventually offer a workplace pension scheme and automatically enrol eligible workers in it.  Under the scheme, all eligible employees must be enrolled in the scheme, and employers are obliged to make a contribution to the scheme. Basically if you own a business that employs one worker or more you’ll need to:

  • Set up a workplace pension scheme that meets the new rules  
  • Automatically enrol workers who meet the age  and earnings criteria
  • Pay contributions into the retirement pots of  eligible workers
  • Enrol other workers if they ask to join the scheme

Larger employers have been required to do this since October 2012, and the requirement is gradually extending so that all employers must have a scheme in place by 2018.  Between January 2016 and April 2017, employers with fewer than 30 staff will be contacted by The Pensions' Regulator with the deadline by which a shcmee needs to be in place.  Even the smallest employer – for example, if you employ one person – will be obliged by law to enrol staff.

The idea behind the scheme is to encourage people to save more for their later life income – the Government, frankly, can't afford the predicted future pensions bill (ageing population, lower mortality) and so wants people to provide for themselves.  Auto enrollment – where people have to actively opt out of the scheme (rather than opt in – behavioural economics coming to the fore here!) – is a way of making more people build up savings.  Those who are already in a workplace pension scheme or who are self employed are not impacted.

The scheme is being introduced in stages and we are now at the point where smaller employers are beginning to be impacted.  All UK employees who are not already in a suitable workplace pension scheme, are aged between 22 and state pension age (note that this is also changing) and earn more than £10K a year (2016-17) must be offered the scheme.  It applies to all employees including those on short term contracts, employed by agencies or who are on leave (i.e. maternity leave etc) and it is compulsory for employers to pay into the scheme.

The Government has set a minimum contribution which must be paid into the scheme which is currently 2% of the employees earnings over £5,824 (including overtime and bonuses).  This is made up of;

  • 0.8% paid by the employee
  • 1% paid by the employer
  • 0.2% as tax relief from the Government

However, this minimum amount will increase – from April 2018, it will be 5% of your employees earnings (2% employer contribution) and from April 2019 it isll be 8% (3% of which is the employer contribution).

If you do employ anyone, you need to be ready to meet these new obligations – but this is not necessarily hard, daunting or expensive. If you want to use an adviser, you can – but equally, you can set the scheme up yourself through NEST (the Government organisation set up especially for auto enrolment) or there are many providers offering easy and simple 'solutions' for employers.  Below you will find a number of helpful guides, links and resources to help you decide what, and how, to move forward.

Note:  Figures correct for the 2016/17 tax year