Auto enrolment puts the responsibility for paying into a workers’ pension scheme on the company that employs them.
It affects all companies, large and small, so everyone needs to know about it, including employees who should understand what their employer needs to do on their behalf.
What is Auto Enrolment?
Auto-enrolment is a government initiative intended to help all employees make provision for their pensions. Before auto-enrolment, some companies either didn’t have pension schemes, or made joining the scheme optional.
Joining the pension scheme is no longer optional, with companies now required by law to enrol their employees into a pension scheme and pay into it themselves.
Who Does it Affect?
Contractual relationships can sometimes be a little hazy, but if anyone is employed as a ‘worker’ they should be subject to auto enrolment in a workplace pension. A ‘worker’ is defined as:
- Someone with a contract of employment.
- Someone who performs their job or services personally for the company, not as part of work undertaken for their own business.
- Anyone working for a third party who is supplied to the company through an agency.
Physical location where the work takes place is not a factor so, for instance, telecommuters or field workers should still be enrolled.
There may be other instances or types of contract where someone would be considered a ‘worker’, so if you need more details it’s best to consult a specialist. Your accountant may be able to advise.
There are also conditions of eligibility, and these are:
- Anyone aged 22 or more but under state pension age.
- Working in the UK under contract.
- Have qualifying earnings.
However, anyone can opt in if they wish to, so employers still have duties towards them.
When Does Auto Enrolment Start?
Automatic enrolment is currently being phased in. It is expected that all employers and employees will be enrolled in the scheme by 2018.
The reform started in 2008 through the Pensions Act, and is known as automatic enrolment. It means everyone who is eligible will be enrolled automatically in a pension scheme, with the onus on individuals to opt out rather than opt in, as was previously the case.
Each company is issued with their individual ‘staging date‘ which is the date by which they must have enrolled eligible workers.
Can Employees Opt Out?
Yes, they can. It is compulsory to enrol them when a company reaches its staging date, but it’s not compulsory for them to stay in the scheme.
Employees can opt out at any time, and will normally be refunded any money paid in if they opt out within one month of joining. Payment returns after this date depends on the type of scheme the employer set up.
Under auto enrolment rules, workers are automatically re-enrolled every three years, and must opt out again if they so wish.
Why Auto Enrolment?
The state pension doesn’t allow most people to live comfortably. However, it’s been known for a long time that many people neglect putting their own pension scheme into place to help with living expenses after they retire. By paying into the workplace pension scheme, the government intends to resolve this issue.
How Much Does it Cost?
How much the company pays and how much the employee pays depends on earnings, with the government also making a contribution via tax relief on payments.
Minimum amounts are currently 1% of earnings for employers, 0.8% of qualifying earnings for employees, and tax relief of 0.2%. Together these amounts come to 2% of qualifying earning. This amount is set to rise to 8% after 2019.
Is Anyone Exempt?
Self employed people are not required to enrol in the workplace pension scheme, although should put into place some provision to cover retirement.
Owners of a limited company, who are the sole employee and director, are also not required to enrol, although it is possible to set up a workplace pension if they wish.
Penalties for Noncompliance
Failing to comply with auto enrolment can bring severe penalties: Although this list is not exhaustive, the types of penalty include:
- A fixed penalty of around £400
- Escalating penalties ranging from £50 – £10,000 per day that the company falls outside compliance. This depends on the size of the workforce.
- A civil penalty notice if contributions are not paid, which can be up to £5,000 per person or £50,000 per organisation.
Getting ready for and complying with auto enrolment and the workplace pension isn’t an option, but a legal requirement. It applies to all companies, even those that employ just one person.