What businesses need to know about auto-enrolment for 2020/21

What is auto-enrolment? Which employees are eligible? And which businesses must comply? Catherine Hepworth of Birketts LLP answers some FAQs about auto-enrolment in the new tax year.

What is auto-enrolment?

Auto-enrolment is a government initiative which requires employers to automatically enrol all ‘eligible jobholders’ as active members of a qualifying pension scheme (unless they choose to opt out) and to make contributions towards their employees' pension.

Why was auto-enrolment introduced?

It has long been recognised that people have not been saving enough for their pensions and that people are living longer and placing strain on the state benefits system. The auto-enrolment system reforms were the culmination of a decade-long process implemented by the government to help more people save for their retirement.

Auto-enrolment legislation was implemented following the Pensions Act 2008. The main provisions were brought into force in June 2012 and implemented over a five-and-a-half-year staging period.

Which businesses must comply with auto-enrolment?

All UK employers with any number of employees must automatically enrol eligible jobholders in an auto-enrolment scheme.

If any employer does not comply with the auto-enrolment regime, The Pensions Regulator may fine businesses. These penalties range from £50 per day for employers with one to four workers, to £10,000 per day for those with 500 or more workers.

Which employees are eligible for auto-enrolment?

An employer is required to automatically enrol an ‘eligible jobholder’ as an active member of an automatic enrolment scheme, starting from the date the jobholder becomes eligible.

A ‘jobholder’ is defined as a worker that has entered, or works under, either:

a contract of employment
any other contract where they personally undertake to do, or perform, any work or services for another party to the contract

The definition is extremely broad and includes permanent and temporary employees (both full or part time) as well as agency workers, apprentices and employees with employee shareholder status. However, not all workers that qualify as jobholders need to be enrolled on a scheme.

To be eligible for auto-enrolment, a worker must both qualify as a jobholder and meet the following criteria:

they must work in the UK
they must not already be in a suitable workplace pension scheme
they mst be at least 22 years old but under the State Pension age
they must earn more than £10,000 per year for the tax year 2019-2020 (this threshold remains in place for the tax year 2020-2021)

Provided the above criteria are met, a worker will be covered regardless of whether they are on a short-term contract, an agency pays their wages or whether they are on maternity, paternity or adoption leave.

A jobholder currently earning less than £10,000 but more than £6,240 for the 2020-2021 tax year does not meet the eligibility requirements for auto-enrolment. However, they are still entitled to ask their employer to enrol them into a qualifying scheme. The employer cannot refuse such a request and must make contributions on behalf of these jobholders.

An employer should auto-enrol all eligible jobholders at the commencement of their employment/engagement. An employer is entitled to defer enrolling an individual for a maximum of three months. However, if the individual requests to join the scheme during this deferment period the employer must accept the request.

Can employees opt out of auto-enrolment?

A jobholder can choose to opt-out of the auto-enrolment scheme, usually by providing such a request in writing to their employer and completing an opt-out form.

If a jobholder chooses to opt-out within one month of their enrolment into the scheme, the employer will have to refund the contributions made to date. Once a jobholder has opted out, they are able to re-join the pension scheme later, should they wish to do so. An employer must re-enrol any jobholder back into the scheme, approximately every three years, if they still meet the eligibility criteria.

However, before opting out, an eligible jobholder should seriously consider their position. By opting out, the employee will be waiving their right to employer pension contributions, as well as their right to the government’s contribution in the form of tax relief. The contribution an employer makes towards a workplace pension is essentially part of the overall employment package and opting out is akin to turning down pay. It is important that an employer does not do anything to encourage the employee to opt-out of the scheme.

How much do employers have to contribute to auto-enrolment?

From 6 April 2020, the minimum amount that must be contributed by both the eligible jobholder and employer increased. From April, the minimum contribution applies to anything earned over £6,240 up to a limit of £50,000, before income tax and National Insurance deductions, known as ‘qualifying earnings.’

An employer must contribute 3 per cent of the salary earned by an employee, whilst the eligible jobholder must contribute 4 per cent. The government also provides tax relief on 1 per cent of the earnings, bringing the total contribution to 8 per cent of the qualifying earnings.

When calculating contributions, the employer must include:

salary
wage
commission
bonuses
overtime
statutory sick pay
statutory maternity/paternity/adoption pay

It should be noted that some employers’ schemes apply the minimum contribution to the whole of the earnings, not just the qualifying earnings. However, the actual amount an employer and eligible jobholder contributes may vary depending on the type of scheme that has been chosen, as well as the rules of that scheme.

What do businesses need to consider when choosing the right pension scheme?

There are two common types of pension scheme:

Defined Contribution Pension Scheme – this is the most common type of scheme and it takes a contribution from the business and jobholder and invests it. This type of scheme is usually accepted for auto-enrolment.
Defined Benefit Pension Scheme – this scheme is built up by using the contribution paid in by both parties. These schemes are unlikely to accept any new jobholders for auto-enrolment.

There are three broad considerations when trying to decide which scheme is best for the business, and for the eligible jobholders:

What is the cost? A scheme provider will take their fees and charges from contributions and the overall pension pot each year.
Who manages the pension? It may be managed by the individual jobholder or by a scheme manager.
Where will the money be invested? It could be invested in shares, cash or property and it will be important to establish where.

Employers should ensure that they take specialist advice before seeking to make any changes to their workplace pension provision. Advice is also available at the government’s The Pension Regulator website.

Catherine Hepworth Birketts