What Is It?
Auto Enrolment is the governments plan to get the majority of staff in the UK into a workplace pension scheme, with both employers and employees contributing towards it. Workplace pension schemes pay out in addition to the state pension.
Auto Enrolment was launched in October 2012 and was gradually rolled to all UK businesses using a system of Staging Dates. From October 2017 it is compulsory for every UK business to be complaint with auto enrolment, including any new businesses.
This adds an additional thought point for new businesses setting up with employees, as they need to be able to offer an Auto Enrolment pension scheme from the outset.
Who Does It Cover?
There are three types of workers under automatic enrolment they are called; eligible, non-eligible and entitled. These rules apply to workers who work in the UK.
Workers aged between 22 and the state pension age, earning over £10,000 per year are eligible jobholders. For these employees they will be automatically put into a pension scheme, and both the employer and the employee must make pension contributions.
Workers aged at least 16 and under 75 earning over £5,772 but under £10,000 are non-eligible workers. These employers will not be automatically enrolled, but if they choose to join the scheme both the employer and employee must make contributions.
Workers aged at least 16 and under 75 earning under £5,772 are entitled workers. These workers are not automatically entered into a pension scheme, and if they ask to join the employer does not have to make contributions.
How Does it Work?
Pension contributions fall into two categories, they can either be "Relief at Source" or "Net Pay Arrangement". The difference between the two is how the governments 20% tax credit on pension contributions is given. If you have lower paid employers the scheme type can make a big difference to them receiving this credit.
Relief at Source means the employees contributions are deducted from their net pay, after tax and national insurance has been deducted. The pension contributions are taken with the 20% tax credit applied, so for employees with a 1% contribution, they will only see 0.8% taken from their pay. The pension scheme then claim the 20% credit directly from HMRC.
Net Pay Arrangement schemes mean the pension contributions are taken from the employees gross pay, before tax and national insurance are deducted. The tax credit is applied as the deductions are taken, as they reduce the employees taxable pay. However if you have employees who are not earning enough to pay tax, they will not receive the benefit of the tax credit.
For the majority of businesses contributions are calculated on "Qualifying Earnings". These are earnings between £5,876 and £45,000. Earnings covers a wide range of payments, including salary, bonus, commission, overtime, sick pay, maternity pay.
Contributions are currently taken at 1% for employers and 2% for employees. This will be increasing from April 2018 to 2% for employers and 3% for employees. It will increase again in April 2019 to 3% for employers and 5% for employees.
There are other earnings methods that can be used for the contribution calculation, if you are a business that frequently pays commission it is worth asking us to compare the contribution levels available to you.
What do I do?
The first step is selecting a pension provider, the three main ones set up specifically to deal with auto enrolment are Nest, Now and People's Pension.
Once you have selected your pension scheme and set up a scheme with them, you need to let your employees know what's happening and what scheme you've picked.
At this point you have the choice to delay enrolling your employees into a pension scheme for three month, this is called postponement. You can also do this when new employees begin employment. You will need to tell your employees in writing if you're doing this.
On the first payroll that auto enrolment applies to, you will need to assess all your workers. This means checking their age and earnings to see which category they fall into. You then need to give them a letter telling them which category they're in and how this affects them.
If you have eligible workers you will then enrol them into the pension scheme and begin deducting contributions.
Within three months of your first payroll date you need to submit your declaration of compliance to the department of work and pensions. This tells them which pension provider you've chosen and how many people you've enrolled into it.
Alternatively, you select your pension scheme, and we can take care of the rest!
What do my employees do?
Your employees need to do nothing if they are happy to be enrolled into your pension scheme and make contributions. If they wish to opt out they must arrange this themselves directly with your pension provider. As an employer you cannot advise them on this, and there are hefty fines in place if you're seen to be encouraging them to opt out.
How can we help?
If 2 Sisters Accounting are in charge of your monthly payroll we will take care of all the processing and administration of your pension scheme, leaving you to focus on more important things.