Workplace pensions – an employer’s guide

You need to set up a workplace pension scheme as soon as your first employee starts working for you.

It’s your responsibility to add your employees into this scheme. This is called automatic enrolment workplace pension, which was introduced in 2012 to make it easier for people to save for retirement.

What is a workplace pension?

While people are entitled to the state pension once they reach a certain age, this won’t usually be enough money to live the life they want to lead in retirement.

Workplace pensions are therefore one way to help solve this problem. These are pension schemes set up by employers that their employees can join.

Previously they were seen as an employee perk – the best option for employees was a pension pot based on their salary and years of service. It was important to check the details of a company’s pension scheme before joining them. You’d also have to opt into the pension scheme.

But the world of work has changed drastically over the last few decades. Employees used to stick with their employers for a long time – sometimes spending their entire career with one business. But today, it’s far more common for people to seek new challenges and change employers every few years.

The workplace pension has therefore had to change with this shift. The value of workplace pensions are now more commonly determined by the amount both employees and employers contribute while they’re employed by the business, as well as investment performance.

And automatic enrolment has also made it easier for employees to save for retirement, as each new employer is required to enrol them into its workplace pension.

When did the workplace pension start?

Workplace pensions have been around for decades, but employees usually had to specifically opt into these before automatic enrolment.

Automatic enrolment started in 2012 – this made it law for employers to set up and add their employees into a workplace pension.

Automatic enrolment was introduced in stages. But all employers, both small and large, now need to add each of their employees into a pension.

So whether you have one employee or 10, you need to enrol them into a workplace pension (if they meet the criteria outlined below).

Workplace pension rules

As an employer, you have to automatically enrol your employees into a workplace pension if they:

• work in the UK
• aren’t currently in a workplace pension scheme
• are at least 22, but under the state pension age
• earn more than £10,000 a year

This includes part-time workers, those on a short-term contract, and employees away on maternity, adoption or carer’s leave.

If an employee earns less than £10,000 or isn’t 22 yet, they can still opt into the scheme. You’ll need to make contributions for them – you just don’t need to enrol them automatically.

If you enrol employees late, you’ll have to backdate contributions so that employees end up in the same position as they would’ve been had you been making them on time. Employees are required to make their contributions in this scenario, too.

Employer pension contributions

There’s a minimum amount that you and your employees need to contribute to a pension. In total the contribution needs to be eight per cent of an employee’s earnings, for example:

• employers contribute three per cent
• employees contribute five per cent
• when you deduct contributions from an employee’s pay, you have to pay these into the pension scheme by no later than the 22nd of the following month

You can choose to contribute more into a pension for your employees if you want to – employees usually see this as a perk when deciding whether to join a business.

The government also contributes to a workplace pension in the form of tax relief.

Workplace pension tax relief

The minimum contributions as part of automatic enrolment include tax relief, too.

But how your employees get tax relief is up to you and you need to consider the different options available when choosing a scheme.

These options include:

Tax relief at source – this involves deducting pension contributions from after-tax pay and sending this to the pension provider. The pension provider claims 20 per cent tax relief from the government, but employees who pay tax at higher rates will have to claim tax relief themselves. This option means that employees who don’t pay tax can still get tax relief.

Tax relief from net pay – you deduct your employee’s pension contribution from their earnings before tax. This means they get tax relief by paying less tax on their earnings. But if an employee is on a salary that means they don’t pay tax, they won’t get tax relief – the relief at source option may be better in this scenario.

Salary sacrifice – the employee’s contribution is treated as coming from you as the employer. This reduces the employee’s salary, meaning they pay less income tax and National Insurance – so while they don’t get tax relief as such, their take-home pay is higher. You pay less National Insurance too. But because the employee’s salary is reduced, this may impact any state benefits they’re entitled to, like maternity pay. In this situation, they might prefer tax relief from net pay.

Tax relief is complex and different schemes use different methods. It’s best to speak to a pension adviser or your pension provider about which option is the best one for your employees.

Best workplace pension providers for small employers

According to The Pensions Regulator, there are a few options open to small employers.

Well-known names include:

• National Employment Savings Trust (NEST)
• Standard Life
• Now: Pensions

Other options include The People’s Pension, the Creative Pension Trust, and Smart Pension.

More useful guides for small business owners

• Nest pension schemes: a guide for the self-employed
• Self-employed pensions: what you need to know
• How to write a reference for an employee
• What is business insurance?

Is there anything more you’d like to know about workplace pensions? Let us know in the comments below.