What is Auto Enrolment?
Auto enrolment is a term used to describe employees automatically being enrolled into their company pension scheme; it will be initiated without the employee having to take any active steps on their part. The Government has stated that many employees don’t enjoy the benefits of a company pension scheme because they overlook the opportunity to join the employer’s scheme. Automatic enrolment has been designed to overcome this.
All eligible employees must be auto enrolled into a qualifying workplace pension scheme. Businesses can decide the type of qualifying scheme they wish to use, this could include NEST (National Employment Savings Trust). Every scheme needs to meet minimum requirements with regard to the benefits it gives employees. It is essential that the scheme allows for automatic enrolment for employees and for new employees when they are entitled to join.
Auto Enrolment - The Basics
Every employer will have duties to complete in preparation for their start date, tasks will include;
- ensure a qualifying pension scheme is in place for eligible workers to enrol into
- decide upon a qualifying workplace pension scheme and
- set a minimum 3% contribution level towards a defined contribution scheme or offer the National Employment Savings Trust
- provide membership to a defined benefit scheme, alternatively a hybrid scheme can be offered as long as it meets certain conditions
What is an Eligible Employee?
Employees who are 22 years of age or over, but under State Pension Age (SPA) and earn above the personal income tax allowance £10,600 (2015/2016). Contributions towards the scheme are payable on income between £5,824 and £42,385 a year (2015/2016). The figures will be reviewed every year by the government.
In order to maintain a qualifying pension scheme, employers will have a duty to ensure workers are already members of a qualifying pension scheme and that new employees have the ability to join one.
Auto Enrolment - Staged Introduction Dates
The staging dates for employers will be based on the size of their PAYE scheme and the last two characters of their PAYE reference number. Try our Auto Enrolment Staging Date Calculator
Employers will be given a 3 month waiting period before they are required to auto enrol their employees into their qualifying scheme. It is during this waiting period that employees can elect to opt-in to the scheme earlier and begin saving immediately.
What are the minimum contribution levels for NEST?
If you use qualifying earnings to work out contributions you’ll contribute a percentage of a worker’s gross annual earnings that fall between £5,824 and £42,385. The first £5,824 of their earnings isn’t included in the calculation. For example, if a worker earns £20,000 their qualifying earnings would be £14,176.
This means that qualifying earnings can’t be more than £36,561 (£42,385 minus £5,824) for the 2015/16 tax year. These are annual figures. Because you pay contributions every time you pay your workers, you’ll need to work out qualifying earnings for each pay period in turn. You’ll use these pro rata figures to calculate contributions.
The legal minimum contribution rates vary depending on what part of a member’s earnings you use to calculate contributions. If you’re using qualifying earnings to calculate contributions for a worker, their minimum contribution rates are:
- October 2012-September 2017 - Minimum contribution: 2 per cent. The employer must pay at least 1 per cent of this.
- October 2017-September 2018 - Minimum contribution: 5 per cent. The employer must pay at least 2 per cent of this.
- October 2018 onwards - Minimum contribution: 8 per cent. The employer must pay at least 3 per cent of this.
Auto Enrolment and Opting Out
Employees will be entitled to opt-out of the company pension scheme should they decide they do not want to participate. Employees who provide notice within the official opt-out period will be put back to the financial position they’d have been in should they not have become members in the first place. This would entitle them to a contribution refund of any payments made after auto enrolment took place.
We have designed an employers guide to the new pension rules. Please complete the form to download your free copy, alternatively please contact us for further information or to speak to a workplace pension specialist.