From 1 October 2017, all eligible new employees must be automatically enrolled into a workplace pension scheme. As an employer, it’ll be your responsibility to provide them with one.

If you’re about to hire your first employee, or still haven’t reached your staging date, then this guide will be able to help you get everything in place. In this blog, we’ll cover:

  • What to consider when choosing a workplace pension provider
  • How to calculate and make contributions to employee pensions
  • The tax relief you can claim from the government
  • What you need to tell your employees

But, first up, let’s have a quick recap of what Automatic Enrolment is, and why you need to look at providing a workplace pension.


What is Automatic Enrolment?

You can learn more about Auto Enrolment here but, in a nutshell, it’s now your legal responsibility to provide a workplace pension to all workers who:

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

Why was Auto Enrolment introduced?

This was introduced by the government to improve pensions saving in the UK. Due to changing living costs and uncertainty surrounding the State Pension, employers and employees are being encouraged to contribute to their own pension and provide for their retirements.

Related: learn more about the Auto Enrolment responsibilities of small businesses.

How KashFlow Payroll can help

Still not up to speed with Auto Enrolment? Don’t worry! KashFlow Payroll offer an end-to-end solution that automatically accesses your employees and enrols them into your chosen pension scheme. It then calculates all contributions, and the setup wizard includes postponement and deferrals. Need to get started? Make Automatic Enrolment easy with KashFlow Payroll.


Choosing a pension provider

So now you know why you have to provide a workplace pension, let’s look at how you do it. It’s not as difficult as it first seems. The first step is to find a pension provider.

When looking for a pension provider, keep the following questions in mind:

  • Will they accept all your staff, with room for future hires?
  • Can you comfortably afford them within your budget?
  • Which is the best method of tax relief for your staff?
  • Does it work with your payroll?

Check whether you can use your scheme for all your staff. Some only accept employers with a certain number of employees, or employees with certain wage levels.

Check if your scheme is regulated by the Financial Conduct Authority, or has been independently reviewed to confirm they offer a good standard of admin. This is called “master trust assurance”.

All work-based pension schemes need to be registered with HM Revenue and Customers. If the scheme has more than one member, it’ll need to be registered with The Pensions Regulator too.

What type of pension schemes are there?

There are two main types of workplace pension scheme: defined contribution and defined benefit.

Defined contribution schemes, also known as “money purchase” or DC schemes, are savings schemes. A pension pot is built up from the employee’s savings, tax relief, and your contributions as an employer. The amount of pension an employee receives depends heavily on how much they and you as an employer contribute.

Defined benefit schemes, also known as “salary-related” or DB schemes, create a pension pot based on an employee’s salary and the length of time they’ve worked for you. This type of pension is more common among larger employers and the public sector.

You could also adopt a hybrid scheme, which includes elements of both. For tailored advice on which type of pension scheme best suits your business model, get in touch with an accountant.

What criteria does my pension scheme have to meet?

For your pensions scheme to be eligible for use in Automatic Enrolment, it must meet certain criteria:

  • Your employees shouldn’t have to do anything to join the scheme
  • Employees shouldn’t have to choose their own investments
  • It must be an occupational or personal pensions scheme
  • It must be tax registered

You pension scheme must also meet certain minimum requirements which vary depending on the type of pension scheme. You can learn more about these specific requirements here.

How much will a pension scheme cost?

Pension providers charge in different ways. Some may present you with a monthly charge, while others request a one-off payment when the pension is first set up. Remember that your provider may also request an exit fee if you decide to change providers, so shop around and make an informed decision.

As the final Auto-Enrolment (AE) staging dates approach, pension providers are reaching peak capacity. As a result, some are asking employers to pay joining fees for enrolling employees. This is an extra cost you’ll need to budget for.

Another thing to keep in mind is that the number of employees your business has could affect the cost of providing a workplace pension. Many pension providers set an annual charge, called a “scheme cost”. The size of this often depends on your number of employees. Generally speaking, more employees will result in a higher scheme cost.

Some schemes have varying charges depending on their income. This means that lower paid staff pay less for their pension. Often, these charges will be paid by the employee themselves.

Rather than pursue the cheapest pension provider, take time to consider the cost against the level of service you’ll receive. In the long run, it may prove more cost-effective to pay more for a comprehensive pension solution.

Budgeting for pension contributions? Get a full view of your finances with KashFlow’s Bookkeeping Software.


Tax relief for workplace pensions

Workplace pensions have variable costsAs mentioned above, the government provides tax relief towards pension provisions. This means that some of the money from your employee’s pay goes into their pension rather than to the government in tax.

There are two methods of tax relief: “relief at source” and “net pay arrangements”. Each affects your lowest and highest paid staff differently. You can only use one method of tax relief in your pension scheme.

What is “relief at source” tax relief?

If it’s relief at source, then the pension provider claims the tax relief from HM Revenue & Customs. The contributions are calculated after PAYE tax, National Insurance and other deductions have been made.

If your staff don’t pay income tax, then they’ll only get tax relief if you use relief at source. If they do pay income tax, but are higher or additional rate taxpayers, then they’ll need to claim their full tax relief using self-assessment.

What is “net pay arrangements” tax relief?

If it’s a net pay arrangement, then you need to calculate tax on the pay left after you’ve paid into the pension. As an employer, you need to deduct pension contributions from your employee’s gross pay (before PAYE tax is deducted). This means your employees automatically pay tax relief at their marginal rate.

If your staff don’t pay income tax, they won’t get tax relief and so will pay 20% more for their pension. In some instances, pension schemes may offer lower member charges to staff if you use a net pay arrangement.


Calculating your contributions to workplace pensions

Employer contributions to workplace pensions

The amount you pay will depend on the pension scheme’s rules. However, the employer contributions made must be at the legal minimum as specified in the table below.

As an employer, you’ll have to provide towards employee pension funds. The below table specifies the amount you’ll have to contribute.

DateEmployer pays*Employee pays*Tax relief of*Total contribution*
Until 6 April 20181.0%0.8%0.2%2.0%
Until 6 April 20192.0%2.4%0.6%5.0%
After 6 April 20193.0%4.0%1.0%8.0%

*Percentage of qualifying earnings.

You can decide what pay is pensionable. You may, for example, decide that overtime or bonus pay is not pensionable – and that just basic pay is used. Whatever you decide, you need to let your pension scheme provider know.

When you’ve deducted these contributions, you legally have to pay them to the pension scheme by the 22nd day of the next month. If you’re paying by cheque, contributions have to be paid by the 19th of the next month.

Related: find out how to minimise the impact Auto Enrolment on your cash flow.

Staff contributions to workplace pensions

Your employees will also have to contribute towards their own pension funds. There are two key methods of contribution: salary sacrifice and contribution matching.

Salary sacrifice is when your employee gives up part of their salary towards a pension. You then match this amount as an employer. As your employee effectively gets a lower salary, you both pay lower National Insurance Contributions.

Contribution matching is rather self-explanatory, you match the contributions of your employees. So if they contribute 3% of their salary, you’d contribute 5%. Your employee may decide to pay more into their pensions and build a fund faster, though you can set a limit to the amount of additional contributions you will make.


Keeping records

As an employer, you need to keep the following records for at least 6 years:

  • Gross earnings for each employee
  • Staff and employee contributions due
  • Any changes to earnings or contributions
  • Details of members leaving or joining the scheme

This information should be used to keep employees up to date with changes to their pension scheme and payments. It can also be used by the pension provider to monitor contributions and make sure they’re fulfilling their role effectively.


Telling your employees about their workplace pension scheme

When you’ve chosen a pension provider and have everything in place, you need to tell your employees.

  • That they’ve been enrolled into a pension scheme
  • What type of pension they’re getting
  • The date from which their pension enrolment starts
  • Who’s providing the pension scheme
  • How to opt out, should they wish to
  • The contributions they will pay, and you will pay as an employer

As part of the Auto Enrolment process, you’ll also need to send regular communications to your staff regarding their pensions. This should tell your employees:

  • How much money they’ve saved in their pension scheme
  • How their money is being invested, and how those investments are performing
  • What the pension pot is projected to be when they retire
  • How much of the money they pay in will be taken in charges
  • Whether they qualify for tax relief, and how to claim it


Pensions can be confusing…

Fortunately, we’re here to help you out. Our no-nonsense approach to business means we can help you at each stage of the workplace pension journey – from finding an accountant to advise you to making sure your employee communications are compliant.

Keep reading: Providing a pension is just one of your responsibilities to your team. Find out how you can help with your team’s training, development, annual leave and much more with KashFlow HR.

See how IRIS KashFlow works with your business and your books