Pension Auto-enrolment - What is it?
Posted on 19th October 2016 at 12:00
Pension auto-enrolment was introduced as part of the Pensions Act 2008, amid growing concerns that the population in general was neglecting opportunities to make payments towards state, private, and employer pensions.
In October 2012, auto-enrolment into a workplace pension scheme became mandatory for large companies in the UK. All employees in the UK between the ages of 22 and state pension age will be eligible for the scheme, so long as they earn above the £10,000 income threshold. By 2018, companies of all sizes (as small as 1 director and 1 employee) will be included in the scope of the legislation. So what does this mean for limited companies?
One-person Limited Companies
If you are a controlling director operating through a one-person limited company, paying yourself a salary of less than £10,000, you’ll be automatically exempt from the legislation. The scheme requires an employee have a contract of employment, so without one, you will not be classified as an employee.
It’s also worth bearing in mind that as this £10,000 threshold considers only ‘gross earnings’, dividends will not count towards the total. As such, if you pay yourself a low salary and high dividends, you’re likely to be exempt.
All limited companies will receive a staging date notice through the post from The Pensions Regulator, letting you know the date from which auto-enrolment will affect your limited company. If you meet the exemption criterion, simply let them know with your letter code, PAYE reference, and Companies House number.
Limited Companies with one or more employees (including spouses and company secretaries)
If you employ any other ‘eligible jobholders’ over the age of 22, and pay them a gross salary that sits above £10,000 (pro-rata) threshold, they are likely to be eligible for auto-enrolment.
It’s also worth mentioning that although employees earing below this threshold will not need to be auto-enrolled, a workplace pension scheme must exist for all ‘non-eligible jobholders’ earning between £5,772 and £10,000, and they must be given the option to join. There is no obligation for a limited company to make a scheme available if employees are paid salaries below the lower earnings limit (currently £5,772).
Other directors and shareholders without a contract of employment will not be classed as employees, and should not affect the limited company’s eligibility.
How much should the contribution be?
The minimum contribution amount is 2% (1% paid into the fund by the employer, and 1% by the employee) and this is set to rise to 5% in October 2017. As the aim of auto-enrolment is to encourage employees to think about their retirement, if you, or your employees, are already paying 2% or more towards a pension fund, the auto-enrolment legislation won’t apply.
Can I opt out?
Anyone can choose to opt out of auto-enrolment, and this includes contractor operating through limited companies. In some cases, you may need to show that you have first made a workplace pension scheme available, and opted in, before opting out.
However, you may find that it is tax efficient to remain in the scheme, particularly if you are caught by the dreaded IR35. At the very least it allows you to benefit from these funds yourself, as opposed to benefitting the taxman.
If you’re unsure of whether or not your limited company should make a workplace pension scheme available, or would like to discuss auto-enrolment in general, please feel free to get in touch.
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