What is automatic enrolment?
Everyone’s heard of it, the biggest tax shake up for a generation. However, if you are still unsure, don’t worry, millions of us are still out of the loop when it comes to automatic enrolment. At Alexander & Co, our tax experts are here with the how the when and the where.
Why is automatic pension enrolment happening?
The latest data from The National Office of Statistics reports the average life expectancy in the UK is now greater than 80 years, meaning many of us may spend more than 20 years in retirement. The government says we are simply not saving enough to make this sustainable in the long term. The government sees automatic enrolment as the best solution to the UK’s “savings inertia”.
Who does automatic enrolment affect?
For the time being, everyone in the UK currently employed between the ages of 22 and the state pension age (currently 65) who earn over £10,000 per year and not currently in a workplace pension scheme is automatically enrolled.
Workers who don’t fit in that age bracket can opt in if they would like to. If you are under the age of 75 and at least 16 years old and earning more than £5,876 a year and ask to be enrolled, your company is legally required to put you forward for the workplace pension in and pay a contribution based on your salary.
Companies are also obliged to enroll any workers aged between16-74 who earn less than that and want to be enrolled in the scheme but won’t be obliged or legally required to pay any contributions.
Automatic enrolment contributions
An employee will pay an absolute minimum into the workplace pension of at least 2% of an their gross earnings (1% of that must be paid by the employer).
By October 2018, 8% will be the minimum total contribution. This will be made up of 4% from the employee, 3% from the company and 1% tax relief.
This won’t apply to all of an individual’s salary, but only what they earn over the minimum and maximum limit. Currently £5,876 and £45,000 respectively.
Does everyone join on 1 October 2017?
All existing employers, including any private individuals who, for example, may employ a gardener or nanny need to have already enrolled by April 2017. However, the government is staggering the roll out.
Automatic enrolment begins on October 1st for large companies (those with more than 120,000 employees). They will be followed by companies employing 50,000 and 119,999 on November 1st. Here is the full time table
What if employees want to opt out?
If they wish to, workers can opt out. The government hopes that making employers contribute, whilst adding tax relief will encourage people to stick with the scheme. However, they have estimated millions may opt out. Some will want to make their own arrangements whilst others will take the view they can’t afford it.
Can you persuade employees to opt out?
Employers are forbidden from offering perks or incentives to encourage employees to opt out. This applies to both new staff members and existing ones. For example, an employer could offer a promotion with a higher salary, containing a condition within their employment contract asking that they do not join the auto enrolment scheme. This is unlawful and with serious consequences. As well as action from the Pension Regulator, the defence costs are likely to be higher than the cost of compliance.
What if you refuse automatic enrolment?
Employers who fail to comply with automatic pension enrolment face a whole range of sanctions. Companies who ignore the pensions regulator first time round could be at risk of a £400 fixed penalty fine.
Those who “willingly and persistently” fail to adhere to the rules will face stricter sanctions. These sanctions are:
- £50 per day for companies with fewer than 5 staff members
- £500 per day for companies with 5 to 49 staff members
- £10,000 for companies with more than 500 employees
Will employees stay in, or opt out?
A quarter of those being enrolled are in their 20s. Many of them are unlikely to be concerned, as by the time they retire, the benefits landscape will undoubtedly be quite different.
Furthermore, someone in their 60s may ‘earn’ much less through the workplace pension than any other age bracket, which is why many over 60s are predicted to opt out. However, for those who have made no other plans for retirement, other than their state pension, this could be a nice bonus.
How do employees opt out?
Employees will have one month to complete and submit an opt out notice to their employer and contributions up to this point will be returned.
Accounting for pensions
Check out the government’s downloadable booklet or this calculator to see how much you might get back. For more help and clarification regarding automatic enrolment for your business, make sure you get in touch with one of our expert tax accountants here at Alexander & Co.