Auto enrolment presents a new set of risks and opportunities for your business. Our goal is to help small and medium-sized companies in the North East adapt to the new rules as smoothly and efficiently as possible.
We have provided an overview of the key issues below. To receive personalised advice for your company, we recommend booking an appointment with one of our advisers by phoning 01642 477758, emailing email@example.com or visiting our Contact page.
On this page:
- What is auto enrolment?
- What if I don’t comply?
- What is my staging date?
- How much will it cost me?
- What is salary sacrifice?
- What if I already have a workplace pension scheme in place?
- What other responsibilities do I have?
- How Bob Little & Co can help you?
What is auto enrolment?
Auto enrolment is a workplace pension legislation which was introduced in 2012. It requires all employers in the UK to automatically enrol their employees into a pension scheme, as long as the employees meet certain criteria. Even those employees who do not meet the criteria may still be able to join the scheme.
Once the employee is enrolled, a minimum level of contributions must be paid into the scheme. The total minimum contributions are 2% in the first year 5% in the second year, and 8% in the third year, and this is split between the employer and the employee.
The scheme will build up in value (just like most other pensions) and the employee will eventually be able to draw on the fund when they retire.
Please note that auto enrolment is compulsory for all employers in the UK, so you will have to take action to avoid breaching these new rules.
What if I don’t comply?
The Pensions Regulator can take several actions if you willingly or accidentally breach the new auto enrolment rules. This includes warning letters, fines and court action.
The fines depend on the severity of the breach and the number of staff employed, including a one-off fine of £400 to £50,000 and/or daily fines of £50 to £10,000.
What is my staging date?
Your staging date is very important, as it sets the date you have to meet several of the requirements under auto enrolment. You should start planning as soon as possible because you may have to have taken action several months before your staging date.
Your staging date is based on the size of your payroll scheme on 01/04/2012. You can find your staging date using your payroll reference(s) on The Pensions Regulator website.
How much will it cost me?
The total cost to your company will depend on three factors:
- How many of your employees meet the auto enrolment criteria.
- What level of contributions you choose to make.
- Whether or not you intend to use salary sacrifice (covered further down this page.)
Your employees will be split into three categories: “Eligible Jobholders”, “Non-eligible Jobholders” and “Entitled Workers”. You are only required to make contributions for the first two of these three categories.
When you make a contribution for an employee, you need to pay a fixed percentage based on the employee’s Qualifying Earnings. This is the amount they earn per year between £5,876 and £45,000 (2017-18 tax year). If your employees receive anything on top of a basic salary (such as bonuses or overtime) you will need to take professional advice to decide what should be included in order to calculate your contributions but, as a general rule, all types of earnings are included in the definition of Qualifying Earnings.
The minimum level of required contributions for relevant employees is shown in the table below. The employee must make up any shortfall between the required minimum contribution and the employer contribution.
|Date||Total minimum contribution||Employer minimum contribution|
|Up to 05/04/2018||2%||1%|
|06/04/2018 to 05/04/2019||5%||2%|
Both the employer and the employee can choose to contribute more than the required level. As an employer you are not required to contribute more than the required level even if your employee chooses to do this.
Under HMRC rules, most pension contributions in respect of an employee can be offset as a trading expense. Therefore, you may not be liable to pay Corporation Tax on the contributions you pay.
What is salary sacrifice?
Salary sacrifice is a complicated concept but it can be very tax efficient for both employees and employers.
Essentially, the employee and the employer agree to reduce the employee’s salary in exchange for the employer making a higher pension contribution. This means both the employee and the employer should save money on National Insurance Contributions, which will be calculated on the reduced salary. An example is shown below.
Please note: This example makes a number of simplifying assumptions, so it should not be used to make any decisions about either the suitability of salary sacrifice or pension contributions. The figures shown are annual figures (rather than monthly or weekly).
|Without salary sacrifice||With salary sacrifice|
|Employee income tax||£1,660||£1,660|
|Employee National Insurance contributions||£1,420.32||£1,396.32|
|Employer National Insurance contributions||£1,633.37||£1,605.77|
|Take home pay||£16,719.68||£16,743.68|
|Total cost to employer||£21,863.37||£21,805.77|
In this example salary sacrifice results in the employee earning more (after deductions) and the employer spending less.
Explanation of salary sacrifice: In this hypothetical example, the employee was going to earn £20,000 and make a pension contribution of £200. Instead, the employer and employee agreed to reduce the employee’s salary by £200 (the amount of the employee contribution). National Insurance contributions are paid based on the employee’s salary (i.e. £20,000 without salary sacrifice but only £19,800 with salary sacrifice). The employer’s main National Insurance rate is 13.8% (2017-18) and the employee’s main National Insurance rate is 12% (2017-18). Therefore any reduction in salary will result in a reduction in National Insurance Contributions for both the employer and the employee, which is where the savings are achieved for both parties.
The main downside of salary sacrifice for employees is that the salary is contractually reduced. This means bonus payments could be reduced and mortgage or loan applications could be affected. It is up to the employer and the employee to agree whether or not a salary sacrifice arrangement is appropriate.
What if I already have a workplace pension scheme in place?
Some employers already have a pension scheme in place and already make contributions for their employees. Unfortunately this does not mean that these employers will automatically escape the new rules. In fact, the rules become considerably more complex.
Essentially, you must have a scheme in place which is auto enrolment compliant, so you should speak to your current pension provider or administrator to see if the scheme is compliant. If it is not compliant you will be expected to introduce a new scheme. If it is compliant you may still have duties under auto enrolment, particularly if you do not contribute to the scheme for all of your employees.
We recommend you speak to the current pension provider then seek independent financial and/or legal advice.
What other responsibilities do I have?
There are many employer responsibilities under the new rules, full details of which can be found on The Pensions Regulator website. These responsibilities include keeping your employees informed about certain information by certain dates, informing The Pensions Regulator about the pension scheme you have chosen, assessing your workforce and communicating with your payroll administrator.
How Bob Little & Co can help you
We offer a free initial consultation, which lets you see how we can help you before you incur any fees.
Essentially, we can help you along the way to your staging date. This can involve as much or as little as you require, including assessing your choice of pension scheme, finding out which of your employees will be affected, finding the total cost of auto enrolment, helping you decide about “postponement” and helping to keep you on the right side of the new rules.
Find out more
To book a free initial meeting with one of our advisers please call 01642 477758 or visit our Contact page.