As you get to working age, you’re likely to hear words like pension and retirement plan mentioned more frequently. Many people work tirelessly their entire lives to be able to retire with peace of mind, so whether or not companies are able to offer a pension, or additional benefits that can increase a pension, can become crucial. However, with economic constraints and bill increases, it’s not always feasible for individuals to take money out of their paycheck to put away for the future. This is where auto-enrolment pensions have a big role to play.
As an employer in the UK, you need to know what auto-enrolment pensions are so that your employees can benefit from saving up for their retirement. This applies to small businesses as well as larger ones, so we’ve created this guide to help you understand your responsibilities and how to make sure you’re fulfilling them, including:
- What is an auto-enrolment pension?
- When did pension auto-enrolment start?
- How much is an auto-enrolment pension?
Here’s everything you need to know about auto-enrolment pensions for small businesses.
What is Auto-Enrolment Pension?
So, what is an auto-enrolment pension? According to the Pensions Act 2008, all employers in the UK are required to enrol certain employees in a workplace pension scheme and make contributions to it. This process is known as "auto-enrolment."
Regardless of the size of your workforce, if you employ at least one individual, you have specific legal obligations as an employer, so even the smallest of small businesses have an obligation to provide workplace pensions.
Employees need to be automatically enrolled into a pension scheme and receive your contributions to it if all of the following apply:
- They are classed as a ‘worker’
- They are aged between 22 and State Pension age
- They earn at least £10,000 per year
- They usually (‘ordinarily’) work in the UK
There are some exceptions where you would not need to automatically enrol someone if any of the following apply:
- They have already handed in their notice - or you have given them notice
- They have evidence of their lifetime allowance protection
- They’ve already taken a pension that meets the auto-enrolment rules that you arranged for them
- They get a one-off payment from a workplace pension scheme that is closed and then leave and rejoin you within 12 months of getting the payment
- More than 12 months before their staging date they opted out of a pension arranged with you
- They’re from an EU state and in an EU cross-border pension scheme
- They’re in a limited liability partnership
Your responsibilities include writing to your employees when you have automatically enrolled them into the pension scheme. You need to tell them:
- The date they were enrolled
- The type of scheme and who runs it
- How much your contributions are and how much they will pay in
- How to opt out
- How tax relief applies to them
It is possible to delay the date where you auto-enrol them by up to three months, or longer if the pension is a ‘defined benefit’ or ‘hybrid’ scheme, but you must inform the employee by writing and enrol them sooner if they request it. What you absolutely cannot do is unfairly dismiss or discriminate against an employee for being in a workplace pension scheme or encourage/force them to opt out.
When did Pension Auto-Enrolment Start?
Having been initially introduced by the Pensions Act 2008, the auto-enrolment pension began in 2012 in response to a drastic decline in workers’ pension provisions that saw just one in three private sector workers in a pension. It was the biggest change in saving for retirement in more than a century and by the end of 2012 more than 600,000 were enrolled.
Employers were required to comply with the auto-enrolment duties based on their size, starting with larger employers in October 2012. The reforms were gradually extended to small and micro employers from June 2015 to February 2018. The minimum contribution rates were also introduced in phases and reached their maximum level of 8% of earnings in April 2019.
Today all businesses should be a part of auto-enrolment pensions and there are 22.6 million people enrolled, which is 79% of the workforce.
How Much is Auto-Enrolment Pension?
So, we’ve covered most of the things you need to know about workplace pensions, but how much is an auto-enrolment pension? What does an employer need to do in terms of auto-enrolment pension contributions?
The minimum contribution from employers is 3%, with employees paying in 5%, but there is flexibility, with some schemes allowing employers the option to pay in more than the minimum.
There are multiple methods to determine contributions for auto-enrol pension rates, with statutory minimum levels in place. However, it is possible to opt for higher levels of contributions.
One basis for calculating auto-enrolment pension rates is qualifying earnings, which includes all earnings falling between a government-determined lower and upper limit. As of 2023-2024, the lower limit is £6,240 and the upper limit is £50,270.
The minimum contribution required by law to an employee's pension savings is 8% of qualifying earnings, with employers obligated to pay at least 3% and the employee covering the remaining 5%. Qualifying earnings comprises various types of income, such as salary, wages, commission, bonuses, overtime, statutory sick pay and statutory parental leave pay (maternity, paternity and adoption pay).
Basic earnings, which include basic pay, holiday pay and statutory pay like sick pay or parental leave pay, but not bonuses, commission, overtime, and similar payments, can also be used to determine auto-enrolment pension contributions. If basic earnings are used, the minimum contribution required by law is 9%, with employers obligated to pay at least 4% and the employee covering the remaining 5%.
Lastly, total earnings, which include all earnings such as basic pay, holiday pay, sick pay, bonuses, commission, overtime, and similar payments, can also be used to calculate auto-enrolment pension contributions. If total earnings are used, the minimum contribution required by law is 7%, with employers obligated to pay at least 3% and the employee covering the remaining 4%.
Auto-enrolment pensions have changed the way millions of people save for their retirement by making the process simple and automatic, and while that does come with obligations for employers, it’s a price worth paying to make sure we’re all better prepared for old age.