What will auto-enrolment cost me, the employer?
In general terms auto-enrolment applies to all organisations and individuals that employ people, regardless of the number of people they employ. The costs to you of auto-enrolment will depend on the type of workers you have in your business. All individuals who are defined as ‘workers’ must be considered.
INITIAL ANALYSIS OF WORKERS
Workers includes all employees but may also include people who although not an employee, are entitled to core employment rights such as the National minimum wage. This could include agency workers and short-term ‘casual’ workers. More specifically, auto-enrolment relates to all employees aged between 22 and the state pension age, who currently earn more than £10,000 per year and who are not already in a qualifying Workplace Pension scheme.
Simply, there are 3 categories of workers: eligible jobholders, non-eligible jobholders, and entitled workers. Let’s look at these individually:
An eligible jobholder is a worker who is:
- aged between 22 years and the State Pension age
- earning over the earnings trigger (£10,000 for 2016/17).
- working or ordinarily working in the UK
- not already in a qualifying pension scheme
Most workers in a micro or small-sized business will be eligible jobholders unless the employer already has a qualifying pension scheme. These eligible jobholders are the workers for which auto-enrolment will be required.
An eligible jobholder does have the right to opt out of auto-enrolment if they wish. Meaning that they will not be required to pay pension contributions but they will lose the benefit of their employer paying in contributions also. However as the employer you cannot encourage the worker to opt out!
Other workers (non-eligible jobholders) do not need to be enrolled automatically, but they do have the right to opt in. As the employer, you are required to arrange this and make employer contributions. These non-eligible jobholders are:
- aged between 16 and 21 or the SPA and 74
- are working or ordinarily working, in the UK
- have qualifying earnings above the earnings trigger for automatic enrolment (£10,000 in 2016/17)
- aged between 16 and 74
- are working, or ordinarily working, in the UK
- have qualifying earnings below the earnings trigger
Entitled workers are entitled to join the scheme but there is no requirement on you, the employer, to make employer contributions for these workers (this remains discretionary). These entitled workers are:
- aged between 16 and 74
- working, or ordinarily working, in the UK under their contract
- do not have qualifying earnings payable by the employer in the relevant pay reference period (ie; below £5,824 for 2016/17)
WHAT CONSTITUTES QUALIFYING EARNINGS
Qualifying Earnings cover all of the following pay elements (gross):
- Salary and Wages
- Overtime, Bonuses and Commissions
- Statutory sick pay
- Statutory maternity, paternity and adoption pay
Contributions will be payable on earnings between the lower threshold of £5,824 and the higher threshold of £43,000. The earnings between these amounts are called qualifying earnings. The thresholds will be reviewed by Government each tax year.
MINIMUM EMPLOYER CONTRIBUTIONS
All businesses will need to contribute at least 3% on the qualifying pensionable earnings for eligible jobholders. However, to help employers to adjust, compulsory contributions are being phased in, starting at 1% before eventually rising to 3%.
There is also a minimum contribution which will need to be paid by employees if the employer does not meet the total minimum contributions. If the employer only pays the employers minimum contribution, employees’ contributions will start at 1% of their salary, before eventually rising to 4%. An additional 1% in the form of tax relief will mean that there will be an eventual minimum 8% contribution rate.
Before 5 April 2018
Minimum employer contribution: 1%
Minimum total contribution: 2%
6 April 2018 to 5 April 2019
Minimum employer contribution: 2%
Minimum total contribution: 5%
6 April 2019 onwards
Minimum employer contribution: 3%
Minimum total contribution: 8%
Source: TPR & hmrc.gov.uk