Pensions: Automatic enrolment – What small businesses need to know
You will no doubt be aware by now of the new auto enrolment pension arrangements, which came into effect yesterday and will eventually affect all UK employers.
The new scheme requires employers to auto-enrol all employees into a qualifying pension scheme, to which both employees and employers must make a contribution, making it a kind of compulsory employer-assisted savings scheme (although employees can choose to opt out).
This will of course present potential financial challenges for employees and employers, despite the scheme's good intentions (making it easier for people to save for retirement).
Although small business owners will not have to start auto-enrolling for quite some time yet - that is, if they don't want to (and more on that later) – you’ll still need to prepare for how the changes will affect you.
Although the new pension regulations came into force on 1st October 2012, only the largest employers with more than 120,000 staff needed to start auto-enrolment from this date. Firms with fewer than 120,000 staff will only be legally required to auto-enrol staff onto a qualifying pension on their staging date, of which there are 20 or more between now and 2017.
In terms of small businesses, staging dates for firms with under 50 members of staff are not until 2015.
At the staging date, your main obligations will be to:
• provide a qualifying scheme for your workers
• automatically enrol all eligible jobholders into the scheme
• pay employer contributions for eligible jobholders to the scheme
• tell all eligible jobholders that: they have been automatically enrolled and they have the right to opt out if they want
• register with the UK Pensions Regulator and give them details of your qualifying scheme and the number of people that you have automatically enrolled.
The minimum contribution level is equivalent to 8% of qualifying earnings, of which the employer must pay at least 3%, although you can choose to pay more. The worker must make up the difference, if any, and will receive tax relief on their contributions.
So if an employer pays 3%, the individual must pay 4% and will receive 1% tax relief, based on a basic rate of tax of 20%.
If you don’t already have one in place you’ll need to set up a qualifying scheme before your staging date. Even if your company already operates a pension scheme, you will need to check if it is a qualifying scheme. You can do that here.
Why consider early auto-enrolment?
Even though small firms aren't required to auto-enrol for some time yet, you may want to consider starting auto-enrolment early.
I guess that many of you may be bemused by the suggestion that your firm should auto-enrol early, particularly when you consider it will mean at least a 1% increase in your annual payroll bill.
However, there is another way to think about it and that is from an employer branding perspective. Consider that as more and more employers start to offer auto-enrolment, employers who are not offering auto-enrolment may be seen to have a less attractive benefits offering, which may make it harder for them to entice top talent into their business.
Pensions are one of the most valued employee benefits in the UK, and as we move through the successive staging periods between now and 2017, auto-enrolment will become the norm and those firms with later staging dates (who are not offering auto-enrolment) may become increasingly marginalised in a candidate marketplace that expects auto-enrolment. This may negatively affect their employer brand and make it harder for them to both attract and retain talent.
Small employers should assess the market and understand if their competitors are offering auto-enrolment, and if auto-enrolment is becoming more prevalent in their sector - you may find you want to consider early auto-enrolment to stay competitive.
Find out more
Guidance for employers from the Pensions Regulator:
- Automatic enrolment – act now
- Beginner’s guide to auto enrolment
- Auto enrolment and your business
- Bringing your staging date forward
Have you started preparing for auto enrolment in your small business yet?