This is the first of two blogs dealing with the setting up and ongoing duties of automatic enrolment.
This blog covers the choosing and setting up of the pension scheme, and the costs involved. The next blog will cover who needs to be enrolled, opting in, opting out, and postponement.
Every new employer must now sign up for running a pension scheme from day one of employing their first member of staff. Many new employers will naturally be nervous about the whole process of choosing and setting up of a pension scheme. A confident and knowledgeable agent, bookkeeper or payroll employee will go a long way in helping with the process and thereby minimise the stress levels of the employer. It will also enable the process to progress smoothly and without any last minute panics.
It is of vital importance for the agent, bookkeeper or Payroll/Pension Administrator to be nominated as the additional contact on The Pension Regulator (TPR) website. It will enable the individual administering the pension to see where in the process the employer is, and what communications have been sent out. You can nominate a contact and an additional contact.
Choosing the pension scheme
The first step in setting up the pension scheme is to identify the most suitable pension plan for the staff. AAT members, unless FCA registered, are not allowed to advice on which pension scheme is most suitable. However, AAT members can guide the employer to the relevant section on The Pensions Regulator website all help define the issues that the employer may need to consider when choosing the pensions scheme. The employer will need to consider:
- the costs involved in setting up and maintaining the scheme
- a pension scheme that will accept all workers
- whether the method of tax relief is suitable
- will it work with the chosen payroll software
The set-up costs
Choosing a pensions scheme can be daunting and many employers will choose to use a Financial Advisor. Those costs will need to be budgeted for. Some employers may baulk at spending money in this way. For those employers, The Pensions Regulator (TPR) website has some useful information.
However, whichever pension provider is chosen do make sure that the employer asks about set-up costs. Some providers charge more than others. Encourage the employer to do their homework, because once chosen, it could be difficult to change further down the line.
Administrative costs can also vary. TPR website states that 61% of employers with 1 – 4 members of staff had no overall set up costs. However, that assumes that the employer has in-house staff capable of taking on the administrative task of running automatic enrolment.
For those employers who outsource the payroll and accounting, then on average the costs for a small employer is £150. If engaged as an agent then do be upfront about the amount of time it will take to administer the pension process, and any costs incurred in dealing with the setting up the pension. On average, the TRP quotes fifteen hours work, depending on the need of the employer.
The on-going costs
For this tax year the employer contribution is 2% of pensionable pay, and from April 2019 this will increase to 3%. Employers will need to budget for this amount and make sure that contributions are up to date.
A pension for all workers
Some pensions providers will not take low paid workers, or workers who are employed in trades or professions that they consider unsuitable for their scheme. Any exclusions need to be identified before signing up to a scheme.
Relief At Source or net pay arrangements?
At first this seems an innocuous question to ask. However, for those on low pay it is of vital importance. A pension scheme that uses the Relief At Source (RAS) method will take the contribution from the employee from net pay, and then claim the 20% tax relief from HMRC. This ensures that the employee gets all the entitlement due. A scheme that uses the net pay arrangement will deduct the employee contributions before any tax is deducted. For those who do not pay tax, the pension will cost them 20% more as there will be no tax relief added to their fund.
The Pensions Regulator has list of pension schemes by RAS and net pay arrangements.
Payroll software compatibility
Many payroll software packages have either an integral or add-on to enable pension contributions. However, for the new employer with only one or two employees HMRC’s PAYE Basic Tools (PBT) software may be the one to use. For this software, and some others that do not have an integrated automatic enrolment function, TPR has made available a spreadsheet for working out calculations for staff and employer.
On the website is a step by step guide to setting up a pension scheme.
What we have considered
In this blog the choosing of the pension scheme, the setting up of the pension scheme and the costs involved in setting up it up, as well as the future financial commitment, have been considered.
In part two, we will cover the steps involved with setting up the pensions, including the Declaration of Compliance, the initial enrolment of staff, postponement and opt ins and opt outs. It is hoped that this blog will help keep the employer happy. If not, keep calm and carry on automatically enrolling!
Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.