For employers, setting up an auto-enrolment pension plan for your staff is a must. This guide will delve into the intricacies of auto-enrolment pensions and how to effectively manage them.
Understanding Auto Enrolment
At its core, auto enrolment means establishing a pension system by the employer for the benefit of their employees. Since its inception in 2012, it became mandatory for qualified employees to be part of a workplace pension. Later, we’ll discuss the criteria for an ‘eligible employee’.
Both employers and employees make contributions to this pension, with contributions amounting to a mandatory minimum of 8% of the salary before tax. This initiative by the government was designed to boost the number of UK workers investing in their pensions.
Who’s Eligible for Auto Enrolment?
The majority of UK workers are eligible for an auto-enrolment pension. Your staff’s eligibility depends on:
- Their age bracket.
- Their income.
Here’s the basic eligibility criteria: workers aged 22 or above earning a minimum of £10,000 annually are qualified. Some exceptions include:
- An employee opting out of the scheme in the past year.
- An employee either submitting or receiving a resignation notice.
Employees aged 22 and above earning a minimum of £520 monthly must be a part of your pension plan.
Starting Age for Auto Enrolment
In the UK, the qualifying age for an auto-enrolment pension is 22. However, those aged 16 or older (or with annual earnings of £6,240 or more) can request enrolment. If they do so, you are legally bound to include them and make contributions.
Enrolling New Employees: When and How?
The cornerstone for enrolling new hires in your pension system is the auto-enrolment date. This date is the later of:
- Your auto enrolment staging date.
- When the employee reaches 22.
- The end of their probation period.
Postponing Auto Enrolment
Some employers opt to wait until the employee’s probation period is over before enrolling them. The maximum delay period is 3 months, but immediate enrolment upon joining is also an option.
Remember this: if the new hire qualifies, you have a 6-week period from their enrolment date to integrate them into your pension plan. If an employee chooses to join, contributions from the stipulated enrolment date must be made, potentially leading to backdated contributions.
Temporary Staff and Auto Enrolment
Temporary or part-time employees may still need to be incorporated into your pension system, contingent on their ‘eligible employee’ status. If they:
- Are older than 22.
- Earn above £10,000 annually.
Then they must be included in your pension plan. If younger than 22 but earning over £10,000, they can request to join, though it’s not automatic.
Thresholds for Auto Enrolment
Auto enrolment thresholds impact:
- Employee eligibility.
- Contribution amounts.
They’re based on the income level at which workers qualify and what counts as ‘pensionable’ earnings i.e., how much of an employee’s earnings used to calculate a percentage pension contribution. The Department of Work and Pensions revisits these annually.
Auto Enrolment vs. Salary Sacrifice
Salary sacrifice is a distinct concept from auto enrolment. To put it succinctly, while all salary sacrifice pensions fall under auto enrolment, not every auto-enrolled pension uses the salary sacrifice method.
Salary sacrifice is one method of processing employer workplace pension contributions. It can help reduce National Insurance bills for both the employee and employer. Other processing options that can be used are net pay and relief at source.
Opting Out of Auto Enrolment
Employees can choose to exit the scheme, and there’s no restriction on this decision. If they opt out, you cease contributions unless they decide to re-join. The accumulated funds stay intact for future access or transfer.
Legally, you must provide an annual opportunity for employees to re-join your pension scheme. Every 3 years, they must be automatically re-enrolled if they’re still eligible. If they decline, you’ll have to facilitate their exit once more.
Need help with auto enrolment?
Penfold can help set up or run your auto enrolment pension scheme. Get free salary sacrifice pension consultation and implementation and Industry-beating account management at no extra charge. Book a demo today.