The second article in our series on automatic enrolment, looking at setting up automatic enrolment for a new employer (whether that’s an existing client taking on staff for the first time, or someone who is setting up a new business).
Automatic enrolment series
Part 1 of this series covered what the information that the employer needs to enable them to set up the pension fund. This article covers the basic enrolment parameters and the steps that the agent needs to take to help their client become compliant.
The Pensions Regulator (TPR) website is probably the most helpful government website that has ever existed. Not only is the information categorised according to type of user, that is, employer, financial advisor (agent), trustees, individuals and public service, it also has a document library and a search function that works! Riches indeed for the average user. And to top it all it provides a checklist with all the actions needed to comply with the regulations on it.
Declaration of compliance
Though the declaration of compliance is completed online, TPR has provided a two-page Declaration of compliance checklist that can be printed off and completed as the relevant steps are completed. Its purpose is to help complete the steps involved in AE compliance; it is not a substitute for the Declaration of compliance online process. It is recommended that the checklist be updated every time an action is completed.
The Declaration of compliance must be completed within five months of the start of the legal duties, that is, when staff should be enrolled. It is during this process that the agent receives the passcode to create an account. Once signed up as an agent, and the additional contact for the client, work can begin.
Initial enrolment of staff
The first stage is to let the employees know that they are going to be automatically enrolled into a pension, and what that means for them. TPR website has many useful letters that outline, in English, and if needed, other languages, who will be enrolled, why and how.
Automatic enrolment of employees
The employees to be automatically enrolled are those between the ages of 22 and their state pension age (SPA) and earn over £10,000 per annum. Other staff can join if they wish, and any employee can opt out.
Opt ins and opt outs
As mentioned above, staff have the option to opt-in or opt-out. Of those not automatically enrolled, if they are over 16 years of age and below the SPA and earn more than £116 per week (the Lower Earning Limit), then they may ask to join. If they do join, the employer must contribute as well. For those between the ages of 16 and their SPA but earning less than £116 per week, they may also join, but the employer is not obliged to contribute towards their pension.
The cost to the employee is a minimum contribution of 2%. This is up to April 2019. For the tax year 2019-20 and beyond that contribution will increase to 5%. This could make a significant dent in the employee’s take home pay. That dent could be minimised by the use of salary sacrifice, decreasing the amount of tax and NICs payable. For example, on a salary of £1,000 (with a tax code of BR), the tax would be £200, and the pension contribution (for 2019-20) would be £50. By using salary sacrifice the taxable pay of £1,000 would be reduced by the pension contribution to £950, with the corresponding tax bill shrinking to £190. The NICs would also be reduced, saving a further £6 (£50 at 12%), making a total saving of £16 a month. Over the year this could make a significant difference to the employee. Not only do they save money, but they also contribute to a comfortable old age!
Postponement of staff
Sometimes an employer may choose to postpone the enrolment of an individual employee or employees. Postponement can be for a maximum of three months. After this, the employees must be enrolled.
Some of the reasons for postponing enrolment may be because the employees are seasonal workers, or an employee is due to leave. Whatever the reason, the employees should still be informed.
On completion of the process the Declaration of compliance checklist should be complete, and the online Declaration of compliance updated. All duties done, all relevant staff enrolled, client.
Of course, with the best will in the world, if the employer does not take AE duties seriously or chooses not to take the relevant actions there is nothing that an agent can do to make the client comply. It is hoped that this will never happen and that agent and client work in a mutually beneficial way to ensure client compliance and the successful enrolment of staff.
Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.