Auto-enrolment

What employers should know about auto-enrolment

What is Auto-enrolment?

Auto-enrolment means enrolling your eligible employees into your workplace pension scheme. They will then have the option to opt out of the scheme should they wish to do so. Auto-enrolment was introduced under the Pensions Act of 2008 which states that all employers in the UK must provide a workplace pension scheme. The government introduced the scheme to make the process of saving for retirement easier. It is believed that employees are more likely to regularly contribute to their pension if they do not have to make an effort to opt into a scheme. 

All qualifying employees are automatically enrolled into their employer’s workplace pension scheme as long as they meet the qualifying criteria. Upon joining a company, part of an employee’s salary will be deducted and contributed to their workplace pension each month. Although it is possible to opt out of the scheme, the government hopes that people will make at least the minimum contribution and be inspired by their employers’ contributions and so strive to save more. It is the hope that auto-enrolment will make employees less reliant on the state pension. 

Research shows that since auto-enrolment was introduced in 2012, more than 10 million employees have been auto-enroled and less than 10% have opted out. This is a very promising statistic and shows the success of the scheme. 

Who qualifies for auto-enrolment?

To qualify for auto-enrolment, employees must be aged between 22 and be under the current state pension age. Employees must be earning more than £10,000 per year from a particular employer to qualify and must usually work in the UK. 

However, if an employee is earning less than £10,000 but more than £6,240 they are allowed to ask to join their workplace pension scheme. As an employer, you must permit this. For those earning below £6,240, they have the right to join the pension scheme but the employer will not be obliged to make any contributions.

What is the minimum workplace pension contribution? 

The minimum contribution amounts are determined by your particular pension schemes rules. However, the most common types of pension schemes used for auto enrolment will require a minimum contribution of 8%. The employer must contribute at least 3% of this, leaving the employee to make up the rest at 5%.  Employers can base the minimum contributions to only apply to qualifying earnings of between £6,240 and £50,270  pre-tax. However, some employers may base contributions on an employee’s entire salary.

If on a Relief at Source scheme, an employee’s contribution is boosted further by tax relief. This is a return of the tax that they have paid on their income. For example, an employee earning £30,000 a year will have £99 a month automatically deducted and placed into their workplace pension. Because this figure includes tax of £19.80, it will only cost the employee £79.20. The pension provider will then claim £19.80 as tax relief and add this to the employee’s pension pot.

If an employee wishes to increase their contribution beyond the minimum amount they are free to do so and tax relief will be due on the new amount. Some employers will match employee pension contributions.

Opting out of the workplace pension scheme:

If an employee opts out of their workplace pension scheme within a month of auto-enrolment, any contributions made must be refunded. If more than a month has passed, employees cannot claim a refund but the contribution will remain in their pension pot.

Although opting out of the scheme is not encouraged, there are some circumstances where it may be beneficial. Individuals may consider opting out if they are struggling with large debts or loss of income due to illness. It is against the law for employers to encourage staff to opt out of a pension scheme.

Employees who choose to opt out can re-join the scheme at any time but their employer reserves the right to refuse this if the employee has opted in and out again within a 12 month period. However, an employer is legally required to re-enrol all employees (except those who opted out in the last 12 months) every 3 years at the company’s staging date anniversary (the date auto enrolment duties started for the employer). Should an employee still wish to opt out they can do so again. After re-enrolment has taken place, the employer must file a Declaration of Compliance with The Pensions Regulator to advise them of the fulfilment of their automatic enrolment duties.

The Pensions Regulator:

The Pensions Regulator gives employers guidance on auto-enrolment and helps them fulfil their duties to their employees. If extra help is needed, employers can speak to their business advisor. There is a wealth of information on their website and if extra help is needed, employers can speak to them directly for advice.

Auto-enrolment Eligibility

To qualify for auto-enrolment, employees must be aged between 22 and be under the current state pension age. Employees must be earning more than £10,000 per year from a particular employer to qualify and must usually work in the UK. 

However, if an employee is earning less than £10,000 but more than £6,240 they are allowed to ask to join their workplace pension scheme. As an employer, you must permit this. For those earning below £6,240, they have the right to join the pension scheme but the employer will not be obliged to make any contributions.

Check out The Pensions Regulator website for more detailed explanations of these criteria.

When does an employer not have to auto-enrol an employee?

There are some instances when an employer does not have to auto-enrol an employee into their workplace pension scheme. Some of these reasons are given below. 

An employer does not legally have to auto-enrol an employee who has already given notice that they will be resigning from their job and the company. Auto-enrolment does not have to happen if an employee has already taken a pension that meets the auto-enrolment rules and was arranged by the employer. 

If you are a company director without an employment contract you do not have to be auto-enroled. 

Despite these examples, an employee is usually still able to join their workplace pension scheme if they want to. 

What happens if you are on a low income?

If an employee is earning what is classed as a low income, they do not have to be auto-enrolled into their workplace pension. A low income is classed as £533 per month or less, £123 per week or less or £492 or less over a 4 week period. However, the employee can ask to join the pension scheme but the employer will not be required to make contributions.

What happens when an employee is auto-enroled?

When an employee is auto-enroled into their employer’s workplace pension scheme, their employer must write to them to tell them this. Correspondence must include the date that an employee was added to the scheme, the type of pension scheme and who runs it, how much the employer and employee will contribute, how to opt out of the scheme and how tax relief applies to the employee.