Auto-enrolment – what it is and how it works

What is auto-enrolment?

To deal with the looming pension funding crisis, the government has made it mandatory for all companies to enrol almost all their employees in company pension schemes, to which both employers and employees must contribute.

When does it start?

It starts with a staging date. Each employer has its own staging date; to find out your staging date go to www.thepensionsregulator.gov.uk/employers/staging-date.aspx and enter your PAYE reference. The earliest staging date was October 2012 for very large employers; smaller employers may have staging dates as late as 1st April 2017, and employers that did not exist in 2012 can have staging dates as late as February 2018. At the staging date you must have your scheme in operation and you must start making deductions and paying contributions. You need to inform the pensions regulator of your scheme within five months of the staging date.

Eight steps to meeting your new duties

1. Know your staging date
2. Make sure your employee data is accurate (inaccurate data such as out of date addresses may cause delays and complications)
3. Assess your workforce
4. Consider whether existing pension scheme can be upgraded
5. Communicate with employees
6. Auto-enrol eligible employees
7. Register the pension scheme
8. Make deductions and pay contributions

Three categories of employees

All your employees will fall into one of three categories:

1. Eligible jobholders – you must enrol them. They do not have the choice about whether or not to be enrolled. Once enrolled, you must make employer contributions and they must make employee contributions.
2. Non-eligible jobholders – you do not have to enrol them but you must offer them the option of enrolment. If they take up the offer, then you must make employer contributions and they must make employee contributions.
3. Entitled jobholder – you must tell them about the scheme, and if they choose to be enrolled they can make contributions to it. The employer does not have to make contributions for entitled jobholders, but it can if it chooses to do so.

How to work out which category your employees fall into

This is determined by the following table:

SPA – State Pension Age

The categorisation of employees has to be done on every single pay date. The earnings bands are divided by the number of pay dates in the year. So for monthly-paid employees, the bands are £485 per month and £833 per month. For weekly employees they are £112 and £192 per week. So for employees on variable hours, they can be eligible one week and non-eligible the next.

Contribution rates

Minimum standard rates: From October 2018 the minimum rates are 3% of gross for the employer, and 5% of gross for the employee. The employee’s tax and NIC deductions are worked out on gross pay less the 5% contribution.

Phasing in: Contributions can be phased in at the following rates: Up to September 2017: 1% for the employer and at least 2% total; year to September 2018: 2% for the employer and 5% total.

Based on qualifying earnings: which are (in 2015-16) earnings over £5,824 and up to £42,385. So anyone paid £5,824 or less pays nothing; and there are no contributions on earnings over £42,385.

Three certification options: Instead of making contributions on qualifying earnings, you can choose to make contributions based on full basic salary, or total earnings, at slightly reduced rates. If you do this you don’t get the benefit of the nil rate band up to £5,824.

Postponement

You can postpone enrolment of individual employees by 3 months. At the staging date you could postpone all your employees by 3 months, effectively meaning that the deductions start 3 months later. However the scheme still needs to be in place at the staging date. Thereafter, the enrolment of any new employees can be postponed by 3 months.

Opting in and out

Although the employer must enrol all eligible employees, the employees may opt out of the scheme as long as they inform the scheme (not the employer) within 30 days of enrolment. The employer cannot encourage employees to opt out. All communication about this has to be between the scheme and the employee directly. Employees can opt back in at any time. If an employee opts out and stays opted out, then the employer must automatically re-enrol them in three years time. They then have another 30 days to opt out.