Auto Enrolment and Workplace Pensions –the facts
What does the Workplace Pension mean for employers
With much uncertainty over the future of state pensions, more and more employees are now relying on their employers to help them provide for their retirement. The Government’s workplace pension initiative was designed to help employees gain better financial security in their old age and makes it compulsory for employers of all sizes to offer a qualifying scheme to eligible workers.
So what does this mean for employers? We take a look at the key facts and requirements for businesses.
How do workplace pensions work?
This system will apply to most businesses at some point between October 2012 and April 2017.The workplace pension broadly affects employers of all sizes who deduct tax and National Insurance from their workers’ wages. Where an existing company pension scheme exists, employers can ask their provider if it meets the minimum automatic enrolment requirements and proceed from there. If no existing pension scheme is in place, one must be set up and the workforce assessed to identify which employees are eligible to be included.
For every eligible employee, a minimum contribution must be made by the business and an agreed amount is also taken from the employee’s wages. Contributions which have been deducted from staff pay must be paid over to the relevant pension provider by the agreed date.
Who is eligible for auto enrolment?
Most staff between the ages of 22 and State Pension age, who earn at least £10,000 per year and work in the UK, are eligible for auto enrolment in the workplace pension. Staff who fail to qualify can still request to be put into the pension scheme but in such cases employers are not necessarily required to contribute. Employees who can present proof of their lifetime allowance protection or who specifically request to opt out do not have to be enrolled into the scheme.
What is the staging date?
An employer’s staging date is the date on which their legal duties regarding automatic enrolment apply. This date is based upon the payroll numbers of their business as at April 2012 (unless the business started later) and the deadline for most employers who have not postponed was 1 April 2017. Smaller businesses set up between 2012 and September 2017, and which employ staff, have varying dates on which their legal duties begin, the latest of which is 1 February 2018.
Employers have various responsibilities towards staff who may, or may not, be eligible for the workplace pension. For employees who do qualify to be put into the pension scheme, employer responsibilities include writing to each of them to outline how automatic enrolment applies to them and informing the Pensions Regulator of how the legal duties have been met. This can be done online. Existing and new staff must be notified of the date on which they have been added to the scheme, as well as the type of scheme, who runs it, and what the employer will be contributing.
Staff who are not eligible for automatic inclusion into the scheme should be told about their choices regarding automatic enrolment. They must also be given the option to be included in the arrangement.
If a non-eligible employee does choose to be enrolled in a scheme regardless, employers are not required to pay into it if the employee earns the below amounts or less:
- £490 per month
- £113 per week
- £452 per 4 weeks
If a worker chooses to opt out of a scheme within one month of commencement, employers are required to pay back any staff contribution monies that have been taken from their wages. Staff must also be given the opportunity to re-join the scheme at least once a year if they have opted out.
How much pension is contributed?
Employers are required to pay a minimum total contribution, which is set out by the Government. The minimum sum is currently 1% of the employee’s ‘qualifying earnings’ but, subject to approval by Parliament, this is expected to rise to 3% by 2019. The employee minimum contribution level is currently set at 1%, but by 2019 the total minimum contribution from both employee and employer will be 8%. Individual employers may decide how much of this they wish to cover; some may decide to contribute the full 8%, meaning that their staff need not pay anything.
Qualifying earnings can be calculated as:
- The employee’s earnings before tax, between £5,876 and £45,000 per year
- The employee’s entire salary or wages before tax
Can employers opt out of the workplace pension?
Employers must, by law, offer a workplace pension scheme and it is not possible for an employer to opt out of it. It is possible, however, for an employer to postpone an employee’s enrolment date by up to three months. This may occur if the member of staff is employed on a temporary contract, which is expected to finish within three months, or if the employer wishes to align other business processes with automatic enrolment.
Automatic enrolment can be postponed from the staging date, the employee’s start date, or the date the staff member first becomes eligible for the scheme. Employers are required to write to all staff whose enrolment date is being postponed, to inform them of the decision.
Can employees opt out?
Employees may opt out of the scheme within one month of being automatically enrolled in. They must do this of their own freewill and their decision must not hinder any of their potential opportunities or other benefits offered by the business. If an employee does opt out, any staff contribution that has been made to their pension must be refunded within one month of a valid opt out notice being given.
Keeping a record of opt outs is essential, as employers are required to reapply auto enrolment to every employee once every three years. This means that employees who are determined to remain out of the scheme must actively choose to opt out once every three years.
Find out more with THP Chartered Accountants
For further details on the workplace pension, or for advice on auto enrolment, opt outs and postponement, contact THP Chartered Accountants. Call us free on 0800 6520 025 and we’ll be happy to assist.