The Government has introduced a new law to make it easier for people to save for their retirement. It requires all employers to enrol their workers into a qualifying workplace scheme if they are not already in one. At present, many workers fail to take up valuable pension benefits because they do not make an application to join their employer’s scheme. Automatic enrolment is meant to overcome this.
Who does this affect?
- Are not already in a qualifying workplace pension scheme.
- Are at least 22 years old.
- Are below state pension age.
- Have passed the three month waiting period.
- Earn more than £8,105 a year (i.e. minimum earnings threshold).
- Work or ordinarily work in the UK (under their contract).
Employers have to automatically enrol workers (A worker is defined as a wider category than just employees and can include some contractors and agency workers. As a general rule, if you have to pay the national minimum wage to someone, or they are working a under an apprenticeship, they are a worker).
However, even if employees do not qualify to be automatically enrolled, they still have the right to join the scheme. If an employee tells their employer that they would like to opt in to the scheme, they must allow them to do so.
What is a qualifying workplace scheme?
- A defined contribution scheme with a minimum contribution.
- A defined benefit or hybrid scheme which meets certain conditions.
When is this happening?
Although automatic enrolment began on 1 October 2012, the duties of individual employers will be introduced gradually over the following five years. The Pensions Regulator (TPR) will tell employers when they must have a scheme in place twelve months before their staging date, however, key dates are as follows:
- Employers with 120,000 or more employees will auto-enrol employees on 1 October 2012.
- Those with over 250 employees will begin to enrol employees from 1 February 2014.
- Those with employees between 50 and 249 members will have from 1 April 2014 until 1 April 2015.
- Those with employees between 30 and 49 employees will be expected to comply from 1 August 2015 to 1 October 2015.
- Those with employees of fewer than 30 will have to comply between 1 June 2015 and 1 April 2017, depending on their PAYE reference number.
How much will need to be paid (defined contribution)?
The minimum contribution level required for an automatic enrolment scheme is based on qualifying earnings. Qualifying earnings are a band of earnings of more than £5,564 and £42,475 or less. These figures are for the 2012/13 tax year and are expected to increase each year. Qualifying earnings include salary, wages, overtime, bonuses, commissions, statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay.
To allow an employer to spread the cost of their duties they can phase in the minimum contributions as shown in the table below.
| ||Total must be at least ||Employer must contribute|
|Oct 2012 to Sept 2017 ||2% ||1%|
|Oct 2017 to Sept 2018 ||5% ||2%|
|Oct 2018 onwards ||8% ||3%|
The total required can be made up from an entirely employer funded contribution or a mixture between employer and employee. The employee’s contributions will benefit from tax relief. These are minimum contributions, and the employer and employee can pay more if they wish.
As an alternative to using the qualifying earnings definition, you can choose to use certification.
Here to help
The Pensions Regulator (TPR) will tell employers when their staging date is twelve months beforehand.
If your business would like advice regarding implementing a “qualifying scheme” now or nearer to the time we would be happy to assist you.
Financial Planning Partner