In 2012 the law was changed to oblige all employers to offer a workplace pension scheme to their "qualifying" employees, onto which they would be automatically enrolled.
Businesses with 30 or more employees have now signed up to workplace pensions. The next stage is for businesses with fewer than 30 employees – these firms have an automatic enrolment date from 1 January 2016 to 1 April 2017. The staging date (being the date an employer must begin automatic enrolment) is based on the number of people employed by way of PAYE.
The legislation requires employers to make a minimum contribution of 1% of a worker's qualifying earnings, rising to 2% from October 2017 and to 3% from October 2018.
The employee also has to make contributions of 0.8% of their qualifying earnings, rising to 2.4% from October 2017 and to 4% from October 2018.
Qualifying earnings are currently classed as gross earnings (before income tax and national insurance contributions are deducted) between £5,824 and £42,385 per year. So if an employee earns £30,000 per year the contributions only have to be made on £24,176 (i.e. £30,000 minus £5,824). The qualifying earning levels will be reviewed on a yearly basis.
Employees are divided into three categories - entitled, eligible and non-eligible. These categories are used to ascertain if they are "qualifying" employees. The definition of each of these groups is as follows:
Eligible. These are workers who are automatically enrolled into a pension scheme and for whom the employer has to pay minimum pension contributions. They are workers who fit the following criteria:
Non-eligible. These workers can be enrolled into the pension scheme should they wish to be, and the employer will have to pay pension contributions. They are workers who fit the following criteria:
Entitled. These workers can be enrolled into the pension scheme should they wish to be, but in this instance the employer does not have to pay pension contributions. They are workers who are aged between 16 and 74 earning less than £5,824 per year.
An employee can choose to opt out from the scheme and should do so within one month of being auto-enrolled. Provided the opt-out is made within one month then contributions made by the employee and employer will be refunded by the pension scheme.
If you are unsure of your status, or how your business needs to proceed, it's best to seek professional advice. These changes are enshrined in law and businesses not meeting their obligations, or missing their staging date may face a fine.
Copyright © 2016 Carol Cheesman, principal of Cheesmans Accountants based in Islington, North London.