Is your company ready for auto-enrolment?
Is your company ready for auto-enrolment?
The Pensions Act 2008 brought into law that all employers had to offer a workplace pension to qualifying employees and that these employees would be automatically enrolled into the scheme.
Why Was Auto-Enrolment Enshrined in Law?
The Government is very aware that people are living longer and currently not saving enough for retirement, thus, auto-enrolment was initiated to increase personal retirement savings and to make people take advantage of personal pension schemes. The long-term aim is to ensure that private pension schemes are held by the majority of UK residents when they reach retirement age.
When Do These Changes Come Into Effect?
In 2012 these changes came into effect for any company who employed 30 or more workers. We have now entered the second period, 1st January to 1st April 2017, when all employers below the 30 employee line need to implement the same steps. The deadline by which this has to be done is known as the staging date.
Any employers who do not make payment through PAYE have as their staging date 1st April 2017. All other employers can enter their PAYE details at the Pensions Regulator website and find out what their staging date is set at. If you are not sure of your deadline, it is worth taking the time to check, as failure to comply can lead to statutory and penalty notices and ultimately court action.
What Contributions Have to Be Made Under Auto-Enrolment?
It is required by the legislation that employers make the following contributions:
- From the staging date at least 1% of a worker’s qualifying earnings
- From October 2017 2%
- From October 2018 3%
In turn, the employee also has to make contributions.
- From the staging date at least 0.8% of their qualifying earnings
- From October 2017 2.4%
- From October 2018 4%
How Are Qualifying Earning Defined?
Any gross earnings between £5,824 and £42,385 will be classed as qualifying earnings and this will be reviewed annually.
How Are Employees Categorised?
For the purposes of auto-enrolment, employees are divided into three categories to decide if they are qualified: entitled, eligible and non-eligible.
Eligible: Any employee who fits the following criteria will be automatically enrolled into the pension scheme and the employer will be required to pay contributions for them. These workers must be aged between 22 and the state pension age, they need to be earning at least £10,000 per annum, and they must not already be participating in another workplace pension scheme.
Non-eligible: These employees are not automatically enrolled into a pension scheme but can choose to participate, and if they do the employer will be required to pay pension contributions. This group comprises workers aged between 16 and 74 who earn at least £5,824 but no more than £10,000 per annum. Alternatively, they can be aged between 16 and 22 or between the state pension age and 74 and earn more than £10,000 per annum.
Entitled: Finally, the entitled group of workers can choose to be enrolled into the pension scheme but the employer is under no obligation to make any contributions. This group of workers can be aged from 16 to 74 and will earn less than £5,824 per annum.
Can an Employee Opt Out?
An employee is free to choose to opt out of the scheme and should do so within one month of being auto-enrolled. If the opt out is made within one month then any contributions made by either the employer or employee will be refunded.
When Do I Issue my Declaration of Compliance?
Once you as an employer have met your legal duties in line with auto-enrolment you need to complete an online declaration to the Pension Regulator confirming your compliance. You can also do this should you bring your staging date forward.
What Costs Will I Incur?
Naturally complying with auto-enrolment will incur costs. This will include payroll and pension scheme set-up costs; the cost of advice incurred during setup; and of course the ongoing pension contributions. The Pension Regulator does provide a further breakdown of where you can expect to incur costs.
If you have any doubts about what needs to be done to meet the legal requirements for auto-enrolment seek professional advice from a financial advisor or accountant as early as possible to avoid ramifications.