Workplace Pension: How Does It Work

Your duties as an employer begin on the start date of your first worker.  From this point onwards, you must assess your workers, provide a compliant workplace pension scheme and make the necessary contribution payments, provide employees with the relevant letters and submit declarations to The Pensions Regulator.​

Even if you think you won’t need to put workers into a pension scheme, you still have duties as an employer.​

Setting up a workplace pension scheme can take some time, so it’s a good idea to do this as soon as you decide to hire your first worker.​

You need to choose a scheme that is auto-enrolment compliant.  You may want to find a scheme yourself or you may need to get help from a pension adviser or financial adviser. The Pension Regulator has a list of workplace pension options available if you decide to choose a scheme yourself. ​

There are many pension schemes suitable for small employers.  Some schemes have set-up and/or management charges payable by the employer.  Other schemes are free to set-up and management charges are paid from the workers’ pension pots.​

"Worker" is a broader concept than "employee" as it includes anyone with a contract to perform work / services personally (for example, agency workers) who is not undertaking the work as part of their own business.​

There are different categories of workers:​

Directors, i.e. those registered as such at Companies House rather than those in title only, are not usually classified as workers and are therefore not subject to auto-enrolment.  However, if the director has a contract of employment AND at least one other person (director or employee) also has a contract of employment then the director is classified as a worker and is subject to auto-enrolment.​

The earnings trigger for joining a workplace pension is £192 per week / £833 per month / £10,000 per year.​

Contributions are generally calculated on qualifying earnings, these are earnings between:​

Earnings outside of these thresholds are not subject to workplace pension contributions.  However, you can choose to calculate contributions on total earnings if you so wish.​

The minimum contributions are:​

This gives a total of 8%.  You can make higher contributions, which may enable your employees to make lower contributions so long as the contributions total a minimum of 8%, but cannot be less than 3%.  Employees may wish to make higher contributions, this does not reduce the minimum amount of your contributions.​

As part of each payroll run, workers should be assessed and, where relevant, the employer and employee contributions should be calculated in reference to the earnings trigger, lower level of qualifying earnings, upper level of qualifying earnings and minimum contributions.​

It’s a good idea to use payroll software (e.g. Xero payroll).  Doing so will make worker assessments, contribution calculations, preparing the data for and submitting the data to the pension scheme provider, and tracking compliance much easier.  It is important to ensure your payroll software settings are correct otherwise you may inadvertently make errors.​

Contributions must be paid to the pension scheme by the 19th of each month. For example, if you usually pay your employees on the last working day of the month, the contributions must be paid by the 19th of the following month.​

Many pension schemes collect the contributions by Direct Debit.​

Employers can postpone their workers' auto-enrolment by up to 3 months.  This is often used to account for probation periods and temporary staff and/or to align auto-enrolment dates to payroll periods.​

Workers can opt out within one month of their auto-enrolment date and receive a refund of any employee contributions deducted from their pay.  You would also receive a refund of the employer contributions paid for that employee.​

Employees leaving a pension scheme after one month don’t receive a refund of contributions.  However, after leaving the pension scheme, they may be able to transfer the pension pot to another pension scheme.​

It’s important to note that you can advise your workers of their right to opt out but can’t advise or encourage your workers to opt out.  Opting-out results in the saving of employer's pension contributions, which is beneficial to you but detrimental to your workers.​

Cyclical re-enrolment occurs every three years, typically on the third anniversary of the duties start date.  ​

You can choose to change the re-enrolment date to any date within a 6 month window, being 3 months before to 3 months after the third anniversary of the duties start date.  This is helpful if you want to align to a payroll period, quarter end, calendar year-end, accounting year-end, etc.  ​

Re-enrolment is as simple as it sounds - any opted-out workers are re-enrolled (and can opt out again if they wish). ​

You must write to all of your workers individually within 6 weeks of your duties start date to explain how automatic enrolment applies to them and how, if they wish, to opt out.  Your pension provider may be willing to do this on your behalf.​

If you are writing to workers yourself, The Pension Regulator website has various template letters.  Your payroll software (e.g., Xero, Quickbooks, Sage) may also have template letters and be able to generate the letters as part of the payroll process.​

Letters are also required for workers starting after the initial duties start date and at cyclical re-enrolment.​

Where directors, without contracts of employment, are the only individuals on the payroll, The Pensions Regulator simply needs to be informed that the business is not an employer for pension purposes. The business would only become subject to auto-enrolment duties if workers are taken on at a later date.​

All employers, other than those mentioned above, have to submit a "Declaration of Compliance" to The Pensions Regulator within 5 months of their initial duties start date and each subsequent cyclical re-enrolment date.  ​

Penalties are charged for a variety of reasons, including:​

Payment of penalties doesn’t cancel your duties.​

Workplace pensions can be complicated but Beany can help! Book a meeting with one of our team members or contact us today.​

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