By now, most businesses have probably heard of the government’s pension auto-enrolment pensions initiative, through one of the myriad communications, information alerts and TV adverts on the subject. In a nutshell, this basically says that all business will have to set up an employee pension scheme and compulsorily enrol all of their employees in the scheme. Employees can then choose to opt out of the scheme but they must be enrolled first. This to encourage far greater pensions saving in the UK workforce, with a view to narrowing the gap between pension requirements and funding.
The obligation is being phased in gradually, with larger businesses first; but all businesses will be affected by 2017 and some of the smallest businesses will have to start following the procedures in 2016. The exact ‘staging date’ for each business depends on its size and when it was formed but each PAYE scheme has a specific date and this can be found by entering the company’s scheme PAYE number into the government’s pensions regulator website ( www.thepensionsregulator.co.uk ).
The employer has to make a contribution for each employee enrolled in the scheme, as does the employee. This starts at 1% of pay for the employer and the same for the employee but it will increase each following year, allowing the cost to be phased into the system.
Exemptions from auto-enrolment pensions for small business
There are certain exemptions from the scope of the obligation to provide a pension for the very smallest businesses, which will apply to many Clever Accounts clients, such as freelance contractors, start-ups paying little or no salary, home-workers and other one-director limited companies.
Specifically, the following types of company are exempt:
- Limited companies with a sole director/employee and no other employees
- Companies with a number of directors (or other office holders, such as Company Secretary or non-exec) but where no more than one of them has an employment contract and/or receives payment in the form of a salary
This means that a one-person freelance contractor limited company is exempt from the auto-enrolment obligation, even if the owner/director receives some of his/her income as salary.
Equally, for example, a husband and wife owned company, where both are directors, is exempt, as long as only one director receives a salary.
However, a company where two or more of the directors receive a salary, or a non-director spouse receives a salary (for example for working as the company’s bookkeeper) may be caught in the scope of the legislation, depending on the level of salary.
Any company that has one or more non-director employees receiving a salary, or more than one director receiving a salary, will have to comply with the legislation after their applicable staging date.
Exemption for low salaries
If the company is in scope but the employee(s) all earn below the earnings threshold, currently £10,000 per year, no auto-enrolment is required. So, a sole director limited company employing a spouse, where the spouse earns below £10,000 will not need to auto-enrol, nor will a two or three director company, where all directors only take a minimal salary of £10,000 or less.
However, technically the business still owes duties to its low-paid employees and must provide them with information about their right to opt in or join a scheme and make a declaration of compliance to the Pensions Regulator. However, they don’t need to actually set up a scheme unless and until one of the staff actually chooses to opt in.
What about dividends?
Dividends do not count as salary or earned income. So, a two-director company, where both directors receive a salary below £10,000 and receive the rest of their remuneration from the company, would not need to register for auto-enrolment pensions.
What do exempt businesses need to do?
Exempt businesses do not need to do anything, unless they receive a letter from The Pensions Regulator informing them of a staging date. In these circumstances, they should email email@example.com and complete the details in the pre-populated message that opens when you select that email address. If your computer doesn’t automatically open the message in the email service you use, you can download it and follow the instructions at: http://www.thepensionsregulator.gov.uk/docs/No_employer__duties_template_email.pdf
If your circumstances change so that automatic enrolment duties apply to you, you’ll need to inform The Pensions Regulator of this as soon as possible. For example, if you take on a member of staff other than a director, who earns above the threshold, or if at least two directors start working for you under contracts of employment.
What if my business is caught but my employees want to opt out?
Unfortunately, of this is the case, the business still needs to set a pension scheme up and enrol its employees in it. They can then opt out, following the correct procedure to evidence that this is the case. It is not acceptable to simply not implement a scheme because you only have a few employees and you know they don’t want to contribute to a pension.