You may have heard of it already, but if you haven’t, we’re talking about pensions. And it will affect you and every other employer in the country. You need to know about the regulations and make sure that you’re ready, since the penalties for failing to do so are quite eye-watering. The scheme started for the largest employers at the end of 2012, but one way or another, it will come to you between now and 2018. That may sound like a long time, but the more staff you employ, the sooner it will be.
A little history
Some employers will no doubt remember the last major attempt by government to make sure that ’all’ employees had access to a pension scheme (other than the State pension). Around a dozen years ago there was much concern by employers about what were then known as Stakeholder Pensions. Well they came, and somehow fizzled out after a few years, and never really affected the smallest employers very much. However, while the political complexion of the government may have changed, the basic problem that they see has not: with an ageing demographic, providing a ’liveable’ state pension funded only by taxation and National Insurance contributions is seen as impossible. Hence more has to be done to encourage individuals to contribute into private pension schemes, and the simplest way to do that is to make it happen at their place of employment.
The Pensions Act 2008
This Act introduced the concept of Auto Enrolment put very simply it means that every employer (yes, even if you only have a single qualifying employee) will be required to enrol every eligible employee into a workplace pension scheme at some point by 2018 at the very latest, unless that employee formally declines to take part. Not only will you have to enrol them into an approved scheme, but you will also have to make a certain level of contribution into the scheme for those employees who fall into certain categories of eligibility.
They’ll be watching you
In case you were around during the flap about Stakeholder Pensions and think that there will be all sorts of exemptions and get-out clauses, think again. The intention has been to make the scheme almost escape-proof. For example, it is illegal for any employer to try to persuade any eligible employee to opt out. So you can’t suggest that you’ll replace them with someone who does agree to opt out. Do that and not only will you face potential action from the Pensions Regulator, but quite probably an Employment Tribunal to boot. A further major change from the early 2000s is that the new scheme is monitored through HMRC’s PAYE system, which now uses Real Time information. So in theory, there is enough up-to-date information about every employer and employee for compliance to be checked and enforced rapidly.
There’s not a lot of space to go into the details here, but to give you some idea: every employee aged between 22 and State pension age, earning at least £9,440 per year, will have to be enrolled into an eligible pension scheme, and the employer is required to contribute to the scheme for those employees. Other employees don’t have to be ’automatically’ enrolled but they can request to join your scheme, and you can’t refuse to allow them to do so, although as an employer you will not have to make any contributions for employees earning less than the qualifying amount.
As for your contribution, the rates vary and are based on qualifying earnings currently between £5,668 and £41,450 per year (2013/14 tax year). At the moment, the minimum rate is 1%, but between October 2017 and the end of September 2018 this will rise to 2%, and after October 2018 the employer’s rate will be 3%. However, bear in mind that the qualifying rates will be reviewed annually and there’s no guarantee that the employer contributions won’t also rise at some point.
What else do you need to consider?
Registration and record keeping for a start. All employers are receiving written notice about the scheme from both HMRC and the Pensions Regulator. This includes the date by which each employer must register, and some information about the basic records that you will have to keep to prove that you are complying with the legislation.
Obviously there is a cost to all of this. As an employer, you will effectively be giving a pay rise of between 1% and 3% to each enrolled employee by virtue of the employer’s contributions that you’ll be making on their behalf. If that wasn’t enough to think about, consider those employees who actually do opt-out: are they going to expect to receive that rise anyway, since you’re giving it to their colleagues by default?
Can you avoid it?
In simple terms no. As mentioned earlier, the machinery for checking who should be in a scheme is now more comprehensive than ever, and the penalties for avoiding your obligations are severe: Fail to comply and you could face an immediate fixed penalty of £400 simply for not being registered on time, followed by escalating penalties for every day that you’re in breach of the requirements the maximum at the moment is £10,000 per day. Yes, per day
This sounds serious
Yes, it is. Basically, if you employ anyone under a PAYE scheme then you will fall within Auto Enrolment.
If you’re not concerned by this, then either you’re already sorted or you’re putting your head in the sand. There’s a lot of advice at various government web sites and the like, but even where it’s supposed to be user-friendly, it can be daunting. You should be able to obtain far more useful advice from your accountant and/or payroll provider so contact them now, rather than waiting for the official paperwork to arrive.