Workplace pension auto enrolment – a guide for small company owners

As a business owner, you are probably aware that you must automatically enrol any employees into a workplace pension scheme. Here we look at how the auto-enrolment pension rules work, and explain why many small companies are exempt.

What is auto enrolment?

Under the Pensions Act 2008, all UK employers are now legally required to put qualifying employees into a workplace pension scheme, and make employers’ contributions to each worker’s pension pot.

Who needs to be enrolled on the scheme?

If you are running a business with any employees, how do you work out which members of staff should be enrolled into a workplace pension scheme?

• Firstly, they must meet the statutory definition of a ‘worker’. Most traditional employees will meet this definition.
• Secondly, they must be aged between 22 years of age and the state pension age, and earn at least £10,000 in a year.
• Finally, each worker must ‘usually’ work in the UK.

You can read more detailed official advice here.

What if you don’t have any staff?

The automatic enrolment obligations don’t apply to your company (or you, as an individual), if you are not considered to be ‘an employer’ for the purposes of this legislation.

If your company meets any one of the following criteria, then the new pension rules will not apply:

• You are the sole director of your limited company, with no other employees apart from yourself.
• Your limited company has 2 or more directors who do not have employment contracts, and the company has no other employees.
• Your limited company has 2 or more directors, one of whom has an employment contract, and the company has no other employees.
• Your company has been dissolved, ceased trading, or gone into liquidation.

When were the auto-enrolment rules rolled out?

Since October 2012, staging dates were rolled out to ensure businesses of all sizes allowed their employees to benefit from the scheme.

The UK’s largest companies were the first to comply with the auto-enrolment regulations from 2012 onwards, followed by smaller employers.

The final staging date for new employers was 1st February 2018. This included all ‘small’ businesses.

How do you work out the pension contributions?

By law, you and each eligible staff member must pay 8% of earnings into the scheme. The employer must pay at least 3%.

The earnings change each tax year, but for 2023/24, the earnings you can use to work out your contributions are between £6,240 and £50,270 of gross earnings.

When you make the calculation, you must include the following in each employee’s gross pay:

• Salary
• Commissions
• Overtime
• Bonuses
• Statutory Sick Pay, Maternity Pay, Paternity Pay

When you contribute to an employee’s pension, the employee also contributes. For example, if the employer contributes 3%, the employee must pay the remaining 5% to make up the 8% minimum required by law.

Is it possible to opt out of the workplace pension?

As an employer, you can’t opt employees out of the workplace pension scheme – and it is illegal to encourage them to do so.

Generally speaking, it is not particularly common for workers to opt out of their pension scheme – only around 10% have done so to date (August 2022 data), as it is a simple and effective way of saving for retirement.

However, employees may wish to opt out – they must do this within a short amount of time after their auto-enrolment has been validated.

How do you choose a workplace pension provider?

If you are required to set up a workplace pension for your limited company, where do you start?

When looking for a provider, here are some things to bear in mind:

• There may be minimum employee limitations to the scheme (e.g. you must have 5+ employees).
• How much are the provider’s initial set-up fees, as well as ongoing annual fees?
• How are your employee’s funds going to be invested? You might have ethical or other preferences for funds.

Many smaller companies have joined the Government’s own NEST scheme. This is a simple way to set up a workplace pension, and ensure you’re compliant with the rules.

Find out more about your pension options

If you are a limited company director interested in finding out about your own personal pension options, read this article.

For the full official government advice covering workplace pensions, click here.