It’s Halloween! It’s the season of spooky things, like werewolves, vampires, and floor underneath the fridge that hasn’t seen light (or a vacuum cleaner) in years. But that’s old hat. We all know what Nosferatu looks like… but you know what’s really spooky? Pensions. When was the last time you checked in on yours? Do you know how much you have to retire on?
Did you just feel a chill run down your spine? Do you feel a little unsettled? Not to worry. You’re not alone.
No-one likes thinking about pensions. A pension means the end of life and all the unpleasant things we try to avoid about old age. Like by not thinking about it, we can dodge the psychopomp. But let’s be honest with ourselves – none of us want to get to retirement age with the dull, yawning horror that we only have a state pension to retire on. When the writer of this post looked up how much state pension they’d get, the figure stood at £ 9,371 per year. Suffice it to say, they’d like a little more than that to retire on.
Thankfully, there’s lots of other ways to save for retirement. In comes the Workplace Pension Scheme. Employers are legally required to automatically enrol any qualifying employees into a workplace pension scheme and top up their pension contributions, and unless you’re the director of a company, your employer was probably responsible for making sure you were enrolled in a workplace pension. But how do they work? And if you’re an employer, what responsibilities do you actually have?
Let’s talk workplace pensions.
Every employer, no matter how small, has to evaluate their employees to see if they qualify for a workplace pension. Even if you only have one employee. Even if they only work part-time. The criteria are simple; if the employee,
- is aged between 22 and the State Pension age;
- they earn at least £10,000 a year; and
- they normally work in the UK,
then they need automatic enrolment into a workplace pension! Deciding who needs to be enrolled is a job that should be done on the employee’s start date. So what’s next?
Choosing a Workplace Pension Scheme
You need to choose a scheme as soon as possible, because finding the right provider for your business can take some time.
The scheme has to allow for automatic enrolment – your employees shouldn’t have to do anything to join it, and they shouldn’t need to choose their own investments or anything of the like. They should also be either regulated by the FCA (Financial Conduct Authority) or independently reviewed to show they have good standards (or ‘Master trust assurance’). Schemes can also all have various qualification thresholds, like a minimum number of staff, or those staff have to earn a certain amount. You should find a scheme that all your staff can use.
The scheme’s costs for you and your employees should also be considered and weighed against the services you get back. Some services will cost you less in the long run because they’ll save you time. Whilst we’d love to be able to say ‘this scheme is our favourite’, we can’t give you a one-size-fits-all solution here, because there isn’t one. It all comes down to the needs of you as a business and your employees.
You’ll also need to decide how they receive tax relief. There’s tax relief at source, or tax relief at net pay, and they both have their drawbacks and benefits.
Tax relief at source takes the contributions from the after-tax pay and sends it directly to the pension scheme. The pension provider will then do the legwork of claiming the 20% relief directly from the government. This is good for employees who only pay the basic rates of tax, because it doesn’t actually require them to do anything else. For anyone earning higher rates of tax, they’ll have to claim the higher rate of tax relief themselves.
Tax relief from net pay is different – it deducts before paying tax. This means that the employee will get tax relief by paying less tax on their earnings. Naturally, this is not great for employees who don’t earn enough to make any tax, because then they get no tax relief on their pensions. If you have employees who earn too little to make any tax, it’s probably better to find them a pension scheme that provides tax relief at source.
There are also salary sacrifice schemes, where the pension is treated as if it’s come from the employer. This reduces the employee’s salary, but their take home pay ends up higher because they don’t end up paying tax and national insurance on their pension. However, the flipside is it can make benefits like maternity pay lower, because the employee is paying less tax and national insurance. This kind of scheme is therefore not right for everyone.
Or you could save yourself the headache of figuring these things out, and hire an advisor, who’ll take your company’s needs into account and recommend some schemes for you. Whichever works best for you.
Postponing a workplace pension automatic enrolment
What if you’re not sure whether they qualify and need time to assess them? Or, for business reasons, you just haven’t been able to set up a plan for them yet? For example, what if an employee is going to be working unpredictable hours, or they’re only a short time hire? For that, you can postpone the date of their assessment by up to three months.
You can do this individually for each employee. If you’re taking on three employees and are only unsure about one of them, then it’s perfectly acceptable to only postpone the assessment for automatic enrolment for just that one employee.
You have to write to an employee individually within six weeks and let them know that you’re planning to delay assessing them for automatic enrolment. Note that this doesn’t postpone putting them into the scheme – if they write back asking to be placed into the pension scheme regardless, you have to enrol them. All it postpones is that assessment for automatic enrolment.
Contribution Amounts to a Workplace Pension
Contribution amounts will differ from scheme to scheme, but there are minimums that you have to pay. The total minimum contribution is 8% – the employer must pay at least 3%.
If you choose to just pay the minimum, you also have to base the calculation on a specific range of earnings. Not all pay is pensionable. The range of pay that is pensionable is between £6,240 and £50,270 per year – anything above or below that does not count.
- So for an employee making exactly £10,000 a year, only the earnings between £6,240 and £10,000 are pensionable – that’s £3,760.
- Employers have to pay 3% of that amount into the employee’s pension – that’s £112.80 that is paid in by the employer and does not come out of the employee’s salary.
- Employees have to contribute the rest – that’s £188.00 of their salary into the pension.
- In total, the employee saves 8% of their earnings, or £300.80.
Though we’ve used ‘salary’ in this piece, it should be noted that we don’t only mean salaries – all pay, whether it be salary, wages, commission, bonuses, overtime, or statutory parental, adoption and sickness pay count as ‘salary’ for the purposes of pension calculations.
You must pay the contributions into the scheme by the 22nd of the next month after making the deductions. You can be fined by the Pensions Regulator if you don’t.
Writing to your employees
Once you’ve evaluated your employees for automatic enrolment, you have to write to your them and let them know the results, and whether you’ve put them into a workplace pension scheme. This letter doesn’t have to be complicated – just a formal acknowledgement of what you’ve done and why. Your pension provider might do this on your behalf, but to be fully compliant, we would recommend sending your own letter whether the pension provider does or not.
Declare your compliance
The last thing you need to do is the most important – you must declare your compliance with the law to the Pensions Regulator.
To declare your compliance, you will need
- PAYE scheme reference(s);
- Letter code from the Pensions Regulator;
- Your contact details (address, telephone number and email)
- Your relationship to the employer (you can just reply ‘the employer’ if you are)
- Your companies house number;
- Your industrial and provident society number;
- Your registered charity number; or
- Your VAT registration number.
- The contact details of the most senior person at the employer (if not the person filing the declaration);
- The email address of the employer (if not the person filing the declaration);
- The employer correspondence address (if not the person filing the declaration);
- The type of pension scheme used for automatic enrolment;
- The employer pension scheme reference;
- The pension scheme registry number;
- The name and address of the pension scheme used for automatic enrolment;
- The last day of the postponement period (if postponed);
- The total number of staff employed on duties on the start date;
- The number of staff you enrolled on a pension scheme;
- The number of staff already on pension schemes; and
- The number of staff that don’t fall into the above categories.
That’s a lot of information! You should make sure you have it all in place ready to start to smooth the process along and start ahead of time with what you already know; anything you add can be saved at any point.
Someone else can complete the declaration on your behalf, but the responsibility for making sure it’s done lies with the employer alone. The consequences for failing to comply lie with you, the employer, alone.
Your duty to monitor your employee’s ages, income levels, and enrol them onto the scheme continues after your initial duty to enrol them, even established employees who haven’t previously qualified. If they have their 22nd birthday or start earning over the £10,000 threshold, you must automatically enrol them. You also need to continue managing requests to join the workplace pension scheme, even if they don’t meet the automatic enrolment requirements. You’ll also have to run reviews every three years and put employees who have left the scheme voluntarily back into the pension scheme.
Assuming you followed all those steps correctly, you are now fully compliant with the law regarding workplace pensions. We understand it’s a lot, but it is a legal duty of all employers, and it also just another small way you can make sure your employees are well looked after and cared for even after they’ve stopped working for you. When your employees are retiring, they’ll be grateful they saved money.