Workplace pensions for small businesses

Does my business need to have a workplace pension scheme?

If your small business employs staff, it must provide a workplace pension scheme for eligible staff, as soon as you take on your new team member (this is known as your “duties start date”).

As explained on government website GOV.UK: “You must enroll and make an employer’s contribution for all staff who:

• are aged between 22 and the State Pension age
• earn at least £10,000 a year
• normally work in the UK.”

If an employee later becomes eligible to join your workplace pension scheme, for example, because they reach the age of 22 or start to earn more than £10,000 a year, you must put them into your workplace pension scheme and write to inform them of this within six weeks of the day they became eligible.

What is automatic enrolment?

Putting staff into such a workplace pensions scheme is called “automatic enrolment” and its phased introduction began in 2012.

Employees can opt out of the scheme, however, employers are required to automatically re-enrol eligible staff into the workplace pension scheme every three years, even if the employee again decides to opt-out (it’s their decision).

Workplace pension schemes: employer costs

You must pay at least 3% of your employee’s “qualifying earnings” into their pension via your workplace pension scheme. According to GOV.UK: “Under most schemes, it’s the employee’s total earnings between £6,032 and £46,350 a year before tax. Total earnings include:

• salary or wages
• bonuses and commission
• overtime
• statutory sick pay
• statutory maternity, paternity or adoption pay.

“You must deduct contributions from your staff’s pay each month. You’ll need to pay these into your staff’s pension scheme by the 22nd day (19th if you pay by cheque) of the next month.”

Employer contributions for each employee must be paid by the date agreed with your workplace pension provider every time you run your payroll. Missed payments must be backdated. You can be fined if your payments are late or if you don’t pay the correct amount.

What if I don’t have a workplace pension scheme?

If you don’t have a workplace pension scheme and plan to take on staff that qualify – you must set one up. The Pensions Regulator website offers employers an online tool, which may tell you whether you need to set up a workplace pension scheme.

There are four stages to the process:

1. Choose a pension scheme – one that can be used for auto-enrolment.
2. Decide who should be in the scheme – not all employees may qualify.
3. Write to your staff – to explain how automatic enrolment is relevant to them.
4. Declare your compliance – The Pensions Regulator provides a handy declaration of compliance checklist.   

Pensions for the self-employed

According to government estimates, there are 4.8m self-employed people (AKA sole traders) in the UK. If you’re one of them (or you’re considering going self-employed), you too should pay into a pension scheme.

You won’t have an employer contributing to your pension, of course. But, as explained on the Money Advice Service website: “There are still some tax breaks you shouldn’t miss out on. For example, you’ll get tax relief on your contributions, up to the lower of your annual earnings or £40,000 a year. This means if you’re a basic-rate taxpayer, for every £100 you pay into your pension, the government will add an extra £25.”

How do self-employed pensions work?

You’re advised to start paying into a pension as soon as possible, so that you can contribute more, get greater tax relief and have more time for the value of your money to grow.

Most self-employed people use a personal pension for their pension savings. There are three types:

• Ordinary personal pensions (offered by most large providers)
• Stakeholder pensions (the charge is capped at 1.5% and you can stop and start premiums without penalty) and
• Self-invested personal pensions (SIPP – which offer a more diverse range of investment options, but with higher charges).

Usually, you can choose how you want your money to be invested – and how you don’t. The provider will invest in a range of funds and claim tax relief and add this to your pension savings.

The more you invest and the better the fund performs, the more you’ll receive when the pension is payable. You can save as much as you like towards your pension each year, however, you’ll only get so much tax relief.