21 May 2015
What your business should know about auto-enrolment
Complying with auto-enrolment is not straightforward – its legal framework and the penalties for not complying can pose a host of challenges. Employment lawyer, Chris Brazier answers some frequently asked questions on the government initiative.
1. Does auto-enrolment apply to my business?
Auto-enrolment applies to all employers, though smaller employers will not be required to set up an auto-enrolment pension scheme until their ‘staging date’ — generally some time from 2014 onwards.
You should ensure that you understand what you need to do well in advance, as setting up an auto-enrolment pension scheme can be complex and time-consuming.
2. When does auto-enrolment start?
Your staging date — the date auto-enrolment starts for your business — depends on how many employees you have. For existing employers, the staging date is normally based on the number of people in their PAYE scheme on 1 April 2012.
Staging dates for the largest employers started in October 2012.
Staging dates for employers with between 50 and 249 employees are between 1 April 2014 and 1 April 2015.
Employers with 49 or fewer employees will need to start auto-enrolment between 1 August 2015 and 1 April 2017.
Staging dates for new employers (who started after 1 April 2012) are between 1 May 2017 and 1 February 2018.
You can check your staging date by entering your employer PAYE reference on the Pensions Regulator website.
3. Does auto-enrolment affect us if we already offer employees a pension scheme?
Yes. You will need to check whether your existing scheme meets the requirements of auto-enrolment: for example, in terms of which employees can be members and the size of contribution you make. You will also need to make sure you set up the right systems to handle automatically enrolling your employees.
4. Does auto-enrolment apply to all employees?
Auto-enrolment applies differently depending on how old the person is and how much they earn.
Employees aged between 22 and state pension age who earn at least £10,600 a year (2015—16) are ‘eligible jobholders’. You must auto-enrol them (but giving them the option to opt-out) and must make contributions.
Employees aged between 16 and 74 who earn at least £5,824 (2015—16), but who are either the wrong age or earn too little to be ‘eligible jobholders’, are ‘non-eligible jobholders’. They do not have to be auto-enrolled but have the right to opt-in. If they opt-in, you will have to make contributions.
Employees aged between 16 and 74 who earn less than £5,824 also have the right to join a pension scheme provided by you. You are not required to contribute.
5. Does auto-enrolment cover people like temporary workers and freelances?
Auto-enrolment applies to all employees. It also applies to any worker who has to perform work personally and is not doing this as part of their own business.
Often, if you use agency workers, the agency will be responsible for paying the workers — and the agency will also be responsible in terms of auto-enrolment. But if you take on a temporary worker directly, or are responsible for paying an agency worker, then you must also deal with auto-enrolment.
Self-employed freelances will not normally (but may in certain circumstances) be covered by auto-enrolment. The rules are similar to the rules which determine whether someone counts as genuinely self-employed.
If in doubt, you should take advice.
6. What scheme providers are there and which should I choose?
There is a government scheme, the National Employment Savings Trust (NEST), or you can choose a pension scheme offered by a private provider.
An independent financial adviser can help you decide which scheme is best for your business. Amongst other things, you will want to consider what the costs of the scheme are and how easy it is to use.
7. How do auto-enrolment opt-outs work?
Eligible jobholders — aged between 22 and state pension age and earning at least £10,600 a year (2015—16) must be auto-enrolled in the pension scheme. At the same time, you must provide a written explanation of what this means and their right to opt-out.
The employee then has a month to opt-out. Any contributions that have already been made by the employer or deducted from the employee’s pay are then refunded.
If an employee decides that they want to leave the pension scheme after the end of the opt-out period, they do this under the normal rules of the scheme.
If an employee opts out or leaves a scheme, the employee can make their own savings and pension arrangements (or choose not to save at all). You do not automatically have to make any contribution (unless agreed otherwise in the employment contract).
8. Can an employee who has opted-out change their mind and opt-in again?
Yes, an employee can apply to re-enrol in the pension scheme. They can only do this once every 12 months. Three years after an employee opts-out, you must automatically re-enrol them. Again, you give them the opportunity to opt-out if they wish.
9. What do I do about new employees?
When you take on a new employee, you need to assess what their status is in terms of auto-enrolment — depending on their age and how much they are paid (see 4). If the employee is an ‘eligible worker’ you would then normally need to auto-enrol them in the scheme.
You can choose to postpone automatic enrolment for up to three months. For example, you might want to do this if you are employing a temporary worker. However, you must also give the employee a postponement notice telling them that auto-enrolment has been postponed and explaining their rights.
10. What advice should I give my employees about whether it is better to be part of the scheme or to opt-out?
You should give your employees general information about your pension scheme. For example, you might pass on information from the scheme provider or let them know about other sources of information.
You should be careful not to give advice or encourage an employee to make a particular decision, as you are not qualified to give financial advice. You can offer employees up to £150-worth of independent financial advice on pensions as a tax free benefit.
11. Can I encourage my employees to opt out so that I do not have to operate a pension scheme?
No. You must not do anything to deter your employees from auto-enrolling: for example, offering higher pay to employees who opt-out, or discriminating against employees who do not opt-out.
12. How much do we have to contribute to the pension scheme?
Initially, the amount the employer must contribute is 1 per cent of the employee’s qualifying earnings between £5,824 and £42,385 (2015—16). The total contribution made by employer and employee must be at least 2%.
From 1 October 2017, this increases to an employer contribution of at least 2%, and a total contribution of at least 5%.
From 1 October 2018, the minimum employer contribution increases to 3% and the minimum total contribution to 8%.