Navigating pension schemes if you are a small or medium-sized business can be tricky. But with UK legislation forcing companies to offer them to their employees, getting it right is key to running a successful and happy company. Employers must put eligible staff into a workplace pension as soon as they start working. This makes it crucial that you understand your responsibilities as an employer.
Our guide to small and medium-sized company pension plans aims to help you understand how such schemes work, how much you have to contribute, as well as discussing some key pitfalls to be aware of.
What is a Company Pension Plan?
A workplace pension scheme is a pension that’s arranged by your employer. Contributions are taken directly from your wages and paid into your pension pot. Usually, your employer also adds money to the scheme, and contributions from the government will be added in the form of tax relief.
Are Company Pensions Plans a Good Idea?
For many employees, paying into a workplace pension is a good idea, even if they have other financial commitments, such as a mortgage or loan. This is because they could benefit from contributions from their employer and tax relief from the government. Over time, this money adds up and grows to give potentially larger lump sums and annuities than you would get with a private pension scheme.
For employers, a workplace pension is a great way to add value to their employee benefits package. This can lead to a lower turnover of staff and happier employees. But company pension plans come at a cost that may be difficult to shoulder for some smaller or medium-sized firms.
What Does the Law Say About Workplace Pensions?
The law now obliges every workplace to offer a workplace pension scheme that fulfills certain criteria. They are also compelled to make contributions themselves to the pension plans of employees who pay into the scheme.
Does This Include Small Businesses?
Yes, it does. The law encompasses all businesses no matter how big or small they are.
What is Pension Auto Enrolment?
The law on workplace pensions has changed. Under the Pensions Act 2008, workplace pensions have become ‘opt-out’ rather than ‘opt-in’. This means that most employees are automatically enrolled in a pension provided by their employer. The law also requires employers to pay into their employees’ pension schemes, whether they are auto-enrolled or not.
These company pension rules were brought into force gradually, beginning with big employers before rolling out to smaller workplaces. As of early 2018, Auto Enrolment rules apply to all employers in the UK.
Who Does the Workplace Pension Law Apply To?
As mentioned previously, all businesses no matter how big or small must offer a workplace pension scheme under current legislation. This means that almost every employer in the country must provide a scheme for their staff.
In terms of employee eligibility, generally, if you are a UK-based employee aged between 22 and State Pension age and you earn at least £10,000 per year, you will be automatically enrolled into your workplace pension scheme.
Does An Employee Have to Join the Workplace Pension?
Paying into a pension is one of the most tax-efficient ways of saving for retirement. However, while new employees are auto-enrolled into their employer’s pension scheme, they may opt-out if they wish.
Opting out does not necessarily mean you will receive any payments made into the scheme back. If you opt out within a month of an employer adding you to the scheme, you’ll get back any money paid in. You may not be able to get your payments refunded if you opt-out later as they’ll usually stay in your pension until you retire.
To opt-out you would need to speak to your employer or the pension provider of the scheme.
What if I Am an Employer and I Don’t Currently Offer an Auto-Enrolled Pension Scheme?
If you already have an existing business but don’t participate in automatic enrolment, it is your duty to set up a scheme and ensure that current staff are re-enrolled. Failure to do so can result in a fine.
If you’ve already participated in a company pension scheme in the past but staff have left or chosen to reduce their contributions, you must complete a declaration of compliance to notify the authorities that you have met your duties as an employer. Any new employees will still need to be auto enrolled into the scheme.
How Much Do I Pay into a Business Pension Scheme?
If all the required criteria have been met, employees will contribute a minimum of 5% to their staff pension scheme. This includes a tax relief of 1%. This can be increased if the employee wishes to, and the pension scheme allows.
As an employer, you must pay at least 3% of your employees ‘qualifying earnings’ into their pension scheme. This is the band of earnings used to calculate contributions. In your chosen pension scheme, it is important to find out what counts as earnings as the figure tends to be reviewed on a yearly basis by the government. In most cases it will include:
- Salary or wages
- Bonuses and commission
- Any overtime pay
- Statutory sick pay
- Statutory pay for paternity, maternity, or any other kind of family leave
- Adoption pay
- Holiday pay
Contributions to any workplace pension should be deducted from an employees’ salary on a monthly basis. This money will then need to be paid into the pension scheme by the 22nd of the following month, or the business may be fined for late payment.
Small and medium-sized company pension plans are difficult to understand, especially when starting a new business. We hope that, with a little help from this guide, you find the topic easier to handle going forward.
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