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Tax factsheet: Pensions auto-enrolment

March 2017

A requirement for all employers to auto-enrol eligible employees into a workplace pension is in the process of being phased in. The majority of businesses that were in existence at the start of auto-enrolment in 2012 will now have reached their staging date.

This factsheet outlines the ongoing requirements on employers and highlights some areas of potential complexity – particularly for limited liability partnerships (LLPs) and company directors.

Employer obligations

The duties of an employer include:

  • Enrolling a worker into a pension scheme without the need for any action by the worker;
  • Arranging membership of a pension scheme for those workers who choose to opt-in or join a pension scheme;
  • Administering an opt-out process for workers who decide they do not want to be a member of a pension scheme, including automatic re-enrolment every three years if an employee remains an eligible jobholder;
  • Once a worker is enrolled, making minimum employer contributions to the scheme for eligible jobholders; and
  • Maintaining required records for the scheme and employees, and providing information to workers where appropriate.

Not all workers need to be auto-enrolled: employers must carry out an assessment to identify who should and should not be auto-enrolled.

Following this initial review of staff and auto-enrolment where required, employers need to monitor their payroll on an ongoing basis to identify where a worker must be added to their pension scheme. An obvious example of this would be when a new member of staff is first paid; employers also need to check, however, that other changes (such as an increase in salary which takes an individual over the earnings threshold) have not taken place that would require auto-enrolment for a longer-term employee.

Every three years, employers are required to re-enrol any workers who have opted out of auto-enrolment. As with the initial enrolment, such employees can choose to opt out again – but the employer must first re-enrol them. It is not possible to simply carry over an existing opt-out.

Who needs to be auto-enrolled?

First, the individual must be a worker either under an employment contract or a contract to perform work or services personally. This may include agency workers, but does not extend to individuals who are genuinely self-employed.

Directors and officeholders

Directors are excluded from the auto-enrolment requirements where either:

  • They do not have a contract of employment; or
  • They have a contract of employment, but no-one else (including any other director) does.

This means that ‘one-man band’ companies do not have any requirement to auto-enrol their director/shareholder. In other situations, it will be necessary to consider what employment contracts are in place.

Office-holders, such as non-executive directors and trustees, are excluded to the extent that they are not considered workers. The exclusion here only applies, however, for activities carried out in their capacity as office-holder. It is important to examine the facts of each individual case to identify whether an individual carries out other work which could bring them within the scope of auto-enrolment.

Partners in LLPs

LLPs should not assume that partners are not within the scope of auto enrolment as they may be workers under the Employment Rights Act 1996 (the ERA).

In May 2014 the Supreme Court ruled in Clyde & Co LLP v Bates van Winklehof that a partner of an LLP was a worker under the ERA. Prior to this ruling, previous case law under the ERA said that a partner of an LLP was not considered a worker. Whilst this case and the subsequent ruling concerns the definition of a worker under the ERA, the definition is very similar to that of a worker in the Pension Act 2008 for the purposes of automatic enrolment. The Pensions Regulator’s view is that the Supreme Court’s decision is equally applicable for auto enrolment and they expect LLPs to assess the status of each partner against the definition of worker in the Pensions Act 2008, taking into account the factors highlighted in the Supreme Court judgment. These are:

  • Integration within the organisation;
  • Dependence/subordination; and
  • Exclusivity (ie could the individual provide services to anyone else).

If an LLP determines that a partner is a worker, they are within the scope of auto-enrolment (although see the exceptions below).

Exceptions from auto-enrolment

There are certain situations in which, even though the auto-enrolment requirements are triggered, a business can choose not to auto-enrol an individual. These include:

  • Directors working under an employment contract;
  • Partners in an LLP who are workers for auto-enrolment purposes, but who are not ‘salaried members’ for income tax purposes;
  • Individuals who are under notice; and
  • Individuals who already have pension protection in place.

Care should be taken when considering whether any of these exceptions apply, and employers should take specialist advice where necessary.

Jobholders v entitled workers

The employer then needs to determine whether the individual is a jobholder or an entitled worker. The category of jobholder is then sub-divided into eligible and non-eligible jobholders. The employer’s duties are different for each of these categories of worker as follows:

Eligible jobholders

These workers are eligible for auto-enrolment and:

  • Are aged between 22 and state pension age;
  • Are working or ordinarily work in the UK; and
  • Have qualifying earnings payable in a pay period above the set earnings trigger for auto-enrolment (currently £192 per week).

Non-eligible jobholders

These workers are not eligible for auto-enrolment but can opt-in and:

  • Are working or ordinarily work in the UK;
  • Are aged between 16 and 21, or between state pension age and 74, and have qualifying earnings payable in a pay period above the set earnings trigger for auto-enrolment; or 
  • Are aged between 16 and 74 and have qualifying earnings payable in a pay period below the earnings trigger for auto-enrolment but above the lower earnings level (currently £112 per week).

Entitled workers

These are workers who do not have sufficient qualifying earnings (currently below £112 per week) and who do not need to be automatically enrolled. They do have the right to join a pension scheme, which the employer must facilitate, but the employer is not obliged to pay into the scheme. Entitled workers:

  • Are aged between 16 and 74;
  • Are working or ordinarily work in the UK; and
  • Do not have qualifying earnings payable in a pay period above the lower earnings level for auto-enrolment.

Minimum contribution rates (defined contribution schemes)

The government has set minimum contribution rates from October 2012, which are due to increase in April 2018 and April 2019. The minimum rates comprise the employee contribution and associated tax relief and the employer contribution. Contributions can exceed the minimum.

figure 1

Within the total contribution, the government has also set a minimum percentage that has to be contributed by the employer. This will also increase in March 2019 and March 2019 as follows:

figure 2

There are different rules for defined benefit schemes.

Further useful information can be found on the Pensions Regulator website at: