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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Pensions auto enrolment: information for employers

We understand that auto-enrolment is one aspect of being an employer that can cause some worry, so here we go into some detail about it. For an overview of other obligations that you may have when taking someone on, go to our employment law page.

Content on this page:

What auto-enrolment is

As people live longer, the government believes too many people are not preparing for what could be a long retirement. Automatic ('auto') enrolment means all employers have to automatically enrol certain staff into a pension scheme and make contributions towards it. Usually the staff member will also have to make contributions to the pension scheme which the government may top up with tax relief. If they do not want to be in the pension scheme, the staff member must actively choose to opt out.

As an employer, you need to tell your employee about auto-enrolment and check whether they’re eligible. If they are, you must set up a pension, enrol them and make the correct contributions. You will also need to complete an online form to declare your compliance with the rules. We tell you more about all of these things below.

Employers affected by auto-enrolment

Auto-enrolment affects all employers with staff in the UK. There are no exceptions, not even for the smallest of employers.

This may be daunting, but The Pensions Regulator (which is in charge of auto-enrolment) has lots of help for brand new employers to guide and support you through the process.

When you become an employer, it is important that you give a named contact to The Pensions Regulator at the earliest available opportunity. This will probably be yourself, unless you are asking someone else to help you, for example a tax adviser.

When your auto-enrolment obligations begin

New employers will immediately have auto-enrolment duties. On the first day a person starts working for you (known as your duties start date), you should formally assess them (the criteria are outlined further down this page) to see if they meet the criteria to be put into a pension scheme.

This does not give employers much leeway, but The Pensions Regulator says that when someone is about to employ a worker for the first time, they need to take certain steps in preparation for taking them on, such as determining whether they need to register as an employer with HMRC or taking out liability insurance. Getting ready for auto-enrolment is just one of these steps.

If an employer has missed their duties start date, they still need to work out what their auto-enrolment duties are, and immediately comply with them. They may have to backdate contributions for members of staff that need to be put in a workplace pension, to make up for any missed contributions. We cover more under the heading further down this page: Missed duties start date – what to do.

If you are a new employer, The Pensions Regulator will write to you as soon as they receive your details from HMRC (this will be once you have made your first payroll submission to HMRC) so you will get a ‘nudge’ about what you should be doing. However, in practice, this letter could be issued many weeks after your official duties start date and could still leave you playing catch up and having to make backdated contributions.

It is worth noting that postponement (see next heading) may be able to help new employers, as this facility allows you to ‘defer’ assessing your staff for up to three months and may mean that you do not need to backdate contributions. However, postponement cannot be used if an employer is more than six weeks after their duties start date.

More help on what to do if you have missed your duties start date and on backdating contributions can be found on The Pensions Regulator’s website.

Postponing auto-enrolment

It is possible for an employer to legitimately postpone assessing an employee for auto-enrolment purposes for up to three months.

If you wish to postpone your staff, you must write to them individually (within six weeks) to explain this – template letters that you can use are available on The Pensions Regulator’s website.

Postponement means that if you expect your employee to be with you for a very short period only for example, you might not have to auto-enrol them, even if they are otherwise eligible. However, staff whose auto-enrolment has been postponed by their employer can choose to opt into the pension scheme during the postponement period.

You can also use postponement to help you at the very beginning of your auto-enrolment journey.

Example

Caroline takes on Nula as her first ever employee on 1 April 2023.

Nula will earn £10.50 an hour for 35 hours work per week and is aged 24 (and as such, needs to be auto-enrolled). Caroline has already registered as an employer with HMRC – on 23 March 2023.

HMRC will give The Pensions Regulator Caroline’s details, but only when Caroline sends in her first payroll submission. As Nula is only paid once a month, at the end of the month, this will not be until 30 April 2023 at least.

Caroline only realises about her auto-enrolment duties when she receives a letter from The Pensions Regulator on 5 May 2023 which asks her to confirm to them the chosen point of contact and tells her more about what she needs to do.

Strictly, Caroline must implement auto-enrolment on a backdated basis for Nula from 1 April 2023, which would involve having to pay pension scheme backdated contributions, etc.

However, as Caroline is within 6 weeks of her duties start date, she can postpone assessing Nula until 1 July 2023. This means that she will not need to make any backdated contributions and also gives her a little bit of extra time to start looking into setting up everything for Nula. She must write to Nula to tell her that she is using postponement by 15 May 2023 (within six weeks of her duties start date).

Caroline has until 1 September 2023 to complete The Pensions Regulator’s declaration of compliance (five months from the original duties start date, rather than the postponed duties start date).

More information on postponement is available on The Pensions Regulator’s website.

Criteria employees must meet to be auto-enrolled

The rules say you must automatically enrol all staff who, on your duties start date (explained under the heading above: When your auto-enrolment obligations begin):

  • are aged 22 to state pension age, and
  • are working in the UK – under a contract of employment (or a contract to perform work or services personally as part of someone else’s business – these people are 'workers' under employment law), and
  • have ‘qualifying earnings’ over £10,000 a year (the limit will be frozen at £10,000 for the foreseeable future).

Qualifying earnings include your employee’s wages or salary, bonuses, overtime as well as other items, such as statutory pay, before any tax or National Insurance contributions are deducted.

The qualifying earnings figure of £10,000 a year translates into the following amounts depending on how often you pay your worker:

  • Weekly: £192
  • 2-weekly: £384
  • 4-weekly: £768
  • Monthly: £833

The Pensions Regulator has a guideto help you work out who you need to automatically enrol into a pension scheme.

If your employee does not initially meet the eligibility criteria to be automatically enrolled, they might do at some stage in the future, for example when they get older or if their earnings change. You must therefore monitor them and if they become eligible for auto-enrolment at a later date, enrol them at that point.

What to do if no employees meet criteria

Even if you do not have any workers to automatically enrol in to a pension on your duties start date (explained under the heading above: When your auto-enrolment obligations begin), you must tell The Pensions Regulator by completing and submitting a declaration of compliance.

You have five months to complete your declaration of compliance, but if you have assessed your staff and know that you don't have anyone who needs to be put into a scheme, you can complete it straight away and tick auto-enrolment off your to-do list. This is not the end of the story however, as you have to continually monitor your employee’s age and earnings and, after three years, deal with the re-enrolment process.

It is also your legal duty to write to your staff individually (within six weeks of assessing them) to explain that you do not need to auto-enrol them. More information and template letters that you can use are available on The Pensions Regulator’s website.

Please note that even if your employee does not need to be auto-enrolled, they can still ask to join a pension scheme, and if they do, you will have to set one up and may have to pay into it on their behalf:

  • Non-eligible jobholders: for example those aged 16 to 74, earning from £6,240 (in 2023/24) to £10,000 or those aged 16 to 21 or state pension age to 74 and earning at over £10,000 are entitled to opt in, with an employer contribution.
  • Entitled workers: those earning under £6,240 (in 2023/24) are entitled to join a scheme but are not entitled to an employer contribution if they do so.

Have someone to enrol? What to do next

If you have an employee that you need to auto-enrol, one of the main things you will need to do is to choose a pension scheme that meets the requirements of auto-enrolment. You can find some advice on finding a pension scheme provider on The Pensions Regulator's website.

To make it easier for employers to comply with the requirements, the government has set up a simple, low-cost ‘default’ scheme called the National Employment Savings Trusts (NEST) which employers may use if they wish.

When considering whether NEST is the appropriate scheme to enrol your staff in, you may wish to consider some of the points set out in The Pensions Regulator’s guidance on what to look for in a pension scheme. For example, if your employee is Muslim, you may wish to ensure that the pension scheme you select has a Sharia compliant investment option within the overall scheme that they can choose to put their funds in if they so wish.

Other pension schemes are available. Under The Pension Regulator’s Find a scheme yourself section, there is a list of schemes that are open to small employers.

Note that the method of giving tax relief used by a pension scheme may be a relevant consideration in terms of choosing a pension provider if you have a low-earning employee (more on this below under the heading: Choice of pension scheme and method of giving tax relief).

Once you have set up a pension scheme and put your employee into it, you need to write to them to let them know. You have six weeks to do this. In the letter you must tell them things like:

  • the date you have added them to the pension scheme
  • the type of pension scheme and who runs it
  • how much you will contribute and how much they will have to pay in
  • how they can leave the scheme if they want to

There are strict obligations about what you have to tell your workers, but The Pensions Regulator has prepared templatesto help you comply. Some pension schemes or payroll software packages will help you handle the communications. You can read more about this under the heading below: Auto-enrolment payroll software.

Once you have set up a pension scheme and put your employee in it, you must tell The Pensions Regulator by completing and submitting adeclaration of compliance, giving them certain details, for example which pension scheme you used and the number of people automatically enrolled. You usually need to submit the declaration on The Pensions Regulator’s website within five months of your duties start date (even where you used postponement, as described under the heading above: Postponing auto-enrolment).

The Pensions Regulator provides a checklistthat you can use which sets out all the information that you will need and will help make sure you complete the declaration properly.

You should remember that auto-enrolling your employee should not be looked on as an end in itself. You will have ongoing obligations. For example, you will need to:

  • pay money into your employee’s pension scheme
  • keep accurate records (see the heading below: Record keeping) of what you have done
  •  auto-enrol any new workers when they join, if they meet the age and income thresholds (as outlined under the heading above: Criteria employees must meet to be auto-enrolled), and
  • automatically re-enrol employees every three years, if they have previously opted out.

Again, some payroll software packages will help you carry out these types of tasks.

Employee wants to opt out

Every worker has one calendar month after being auto-enrolled into a pension scheme in which they can choose to opt out. They must do so by giving an ‘opt-out notice’ to you, which is usually provided to them by the pension scheme in their welcome pack.

When an employee opts out within the time frame given, any money paid over to the pension scheme should be refunded to you. You are then responsible for repaying any employee deductions made back to the employee via payroll. This repayment to the employee must be made as soon as possible.

If the employee opts out after the initial one-month period, they can cease their active membership of the pension scheme but usually will not be able to claim any contributions back (the money will stay in the scheme until their retirement).

A worker who has opted out does not need to be assessed again until your next re-enrolment date (occurs approximately every three years).

You should note that any decision to opt out must be your employee’s alone – it is against the law to try and persuade or compel your employee to opt out of auto-enrolment.

You can find detailed guidance for employers on processing opt outs on The Pensions Regulator’s website.

How much you will need to pay into a pension

Qualifying earnings

The amount you and your worker have to contribute under auto-enrolment will typically be based on a percentage of your worker’s 'qualifying earnings'.

Qualifying earnings include your employee's wages or salary, bonuses, overtime as well as other items, such as statutory pay, before any tax or National Insurance contributions are deducted.

The relevant percentage will apply to any qualifying earnings your employee has over £6,240 (for 2023/24) up to the limit of £50,270. The £6,240 and £50,270 yearly amounts translate into the following figures depending on how often your employee is paid:

  £6,240 a year £50,270 a year
Weekly £120 £967
2-weekly £240 £1,934
4-weekly £480 £3,867
Monthly £520 £4,189

 

Minimum level of contribution

You will have to pay the minimum legally required level of contributions into the pension scheme you select. The contribution rates for 2023/24 are set at a 3% employer minimum contribution and 8% total minimum contribution (i.e. employer and employee).

You have the ability to pay more than 3% if you wish. If you contribute the total minimum contribution (8% in 2023/24) then your employee will have to contribute nothing (unless they wish to do so).

If you contribute more than the required minimum amount – but less than the total minimum amount – then your employee only needs to make up the shortfall between the total minimum and the employer contribution.

You should note that your employer contributions will not be a taxable benefit for the employee no matter which tax relief arrangement the pension scheme uses.

Employee contributions

You would usually calculate your employee’s contribution at 4% or 5% of their qualifying earnings each pay day (it is 4% or 5% depending on whether your employee is in a relief at source scheme or a net pay arrangement scheme).

Example: Marcie

Your employee Marcie earns £250 per week. Neither you nor Marcie pay pension contributions on the first £120 of pay, thus you will each pay contributions based on £130 (£250 less £120) each week. You will put £3.90 (3% of £130) into her pension scheme each week. Marcie will put in £6.50 (5% of £130) although, depending on which pension scheme you use, you may only need to deduct £5.20 (4% of £130) from her wages – the rest will be paid into her pension pot by the government as tax relief. More information is given on this point below under the heading: Choice of pension scheme and method of giving tax relief.

You can find more about the costs of auto-enrolment for employers, including set up costs on The Pensions Regulator’s website.

Choice of pension scheme and method of giving tax relief

There are two ways that an employee’s pension contributions can be taken from their pay, depending on the type of pension scheme chosen by their employer:

  • Under ‘net pay arrangements’ (NPA) – where 100% of the pension contribution due under auto-enrolment is deducted before tax is calculated on wages (meaning the employee, in theory, should receive tax relief there and then), or
  • Under ‘relief at source’ (RAS) – where 80% of the pension contribution due under auto-enrolment is deducted after tax is calculated on wages and HMRC later send an extra 20% (representing tax relief) to the pension scheme.

Under RAS arrangements, those who do not pay income tax are nonetheless permitted to this 20% tax relief on their pension contributions. However, this tax relief is not available to non-taxpayers in NPA schemes.

Depending on how much your employee earns, they may therefore miss out on tax relief. Workers who earn over the £10,000 per annum threshold needed to trigger auto-enrolment, but below (or not very much above) the income tax personal allowance (£12,570 in 2023/24) and who are enrolled in a ‘net pay’ pension scheme rather than a ‘relief at source’ scheme, do not get tax relief to help make up their contribution amount. This issue also potentially affects those earning below £10,000 but who opt in to, or join, their employer’s scheme.

Example

Jo earns £950 per month, that is, £11,400 per year. Her employer pays the minimum amount into her workplace pension scheme, so Jo must put £21.50 of her pay into it every month (£950 - £520 @ 5%). The pension scheme operates under NPA, so her employer deducts the pension contribution before calculating tax (but after calculating National Insurance). This means Jo’s earnings are taken to be £928.50 for tax purposes instead of £950. However, as Jo’s earnings fall below the threshold for paying income tax for 2023/24 of £1,048 per month, this reduction in taxable income makes no difference and she gets no tax relief on the contributions paid.

If Jo was in a RAS scheme, her taxable employment income would be £950 a month. She would still not pay any tax, but she would only have to put 80% of £21.50 (i.e. £17.20) of her pay into her pension pot – the rest is paid into it for her by the government. She is therefore £4.30 a month, or £51.60 a year, better off under a relief at source scheme.

The government-backed pension provider, NEST, uses a relief at source scheme, as do some other auto-enrolment scheme providers. However, many auto-enrolment trust based schemes use net pay arrangements.

The government is introducing new law to equalise the position for employees losing out on tax relief under NPAs. This law is not due to come into effect until April 2024.

How auto-enrolment works if your employee’s income varies

Your employee’s income may vary, but if at any point, they earn more than the eligibility threshold for their pay period, you should auto-enrol them at that time (or after three months if you have decided to postpone them). More on the criteria for employees to be auto-enrolled and on postponement can be found under the relevant headings above.

Once they have been enrolled, and assuming they do not opt out, you will then calculate pension contributions each time they are paid. As described above (under the heading: How much you will need to pay into a pension), the percentages only apply to qualifying earnings over £6,240 a year (or the appropriate amount for the employee’s pay period). If their income fluctuates, this may mean that in some pay periods they could earn enough for there to be pension contributions, and in other pay periods they will fall short and there will be none.

Missed duties start date – what to do

If you have realised you are late meeting your duties, or are struggling with them, you should tell The Pensions Regulator straight away. They should help you get back on track.

Where necessary, you will need to work towards putting your staff back in the position they would have been if you had complied on time. You can find out what you need to do to put things right, as well as what to expect if you don’t on The Pensions Regulator’s website. We understand that, in many cases, provided you work with The Pensions Regulator to put things right, you will avoid a fine.

If you do not comply with auto-enrolment at all, you can expect a penalty.

There is a penalty defence of ‘reasonable excuse’ in auto-enrolment, meaning that something unexpected has occurred outside your control that has stopped you meeting your duties. However, some reasons given for non-compliance such as illness, being short-staffed, finding things too complicated, not getting a reminder or confusion between employers and their advisers are not a 'reasonable excuse'.

Please note that a reasonable excuse for HMRC’s tax duties and auto-enrolment duties are separate. Where reasonable excuse might be accepted for tax purposes, it does not mean that it will be accepted for auto-enrolment purposes. Here is a published example of a case where an employer has successfully challenged a penalty on the grounds of reasonable excuse.

Worker leaving or you stop being an employer

What you need to do when a worker leaves your employment or you stop being an employer will depend on the particular rules of the pension scheme you have chosen, so you’ll need to let the scheme know. The pension scheme provider will probably write to the worker to confirm that they won’t be receiving any more contributions from you, but the worker can continue to make their own payments into their pot if they choose.

Auto-enrolment payroll software

If you file your payroll information online, you should check to see if your payroll software is designed to carry out any auto-enrolment tasks to help you meet your auto-enrolment duties. If it does not, then you may want to consider updating or changing it.

Auto-enrolment functionality has been integrated into most of the HMRC approved payroll software packages (including some of the free software) and can make assessing workers, issuing communications, calculating contributions, viewing reports and submitting information to the pension provider, much simpler and easier for you.

If you are a paper filer or use HMRC's Basic PAYE Tools (which is not designed to carry out any auto-enrolment tasks), you will need your own process to assess your employee and calculate contributions.

The Pensions Regulator used to have a ‘basic assessment tool’ (in the form of a spreadsheet) to help you with this, however, this no longer appears to be available. However, by using the guidance and examples on this page, working out who to enrol and what the contributions are hopefully isn’t that hard, even without the basic assessment tool.

Additionally, you will still need to do things like feed employee contribution amounts back into your ordinary payroll calculations (so they can be reported to HMRC and tax relief can be given where appropriate) and provide contribution data and make payments to the pension provider. For a warning about feeding employee contributions into your payroll calculations correctly, see the heading below: Errors.

If you are using Basic PAYE Tools, you would do this on the ‘Add employee payment’ page. So, if for example you have deducted an employee pension contribution of £25 from an employee’s gross (before tax) pay, you would add £21.50 into the box saying: Value of employee’s pension contributions paid under ‘net pay arrangement’.

If you are using NEST (which is a relief at source scheme) or other relief at source scheme, you would need to add the employee contribution amounts into the box saying: Value of employee’s pension contributions paid but not under ‘net pay arrangement’.

Once you have set yourself and your employee up with a NEST account, it is a fairly quick and straightforward process to enter the earnings and contribution data each pay day in the Manage Contributions tab on the NEST website. You can set up a direct debit to pay the amount that you owe and the amount that you have withheld from your employee, over to the pension provider. You can find more information about what is involved on the NEST website.

Record keeping

Employers have a legal requirement to ensure that certain records are kept on both staff and on the pension scheme, for example:

  • the names and addresses of staff they have enrolled,
  • records of when contributions were paid into a pension scheme, and
  • staff opt-in and opt out notices.

These records must usually be kept for six years and can be held electronically or in paper format. You will need to ensure you have a good procedure for keeping these records as The Pensions Regulator could ask for them at any time.

Auto-enrolment and salary sacrifice

Whilst an employee’s pension contributions attract tax relief, they do not ordinarily attract National Insurance contribution (NIC) relief. However, if an employer makes a contribution to an employee’s pension scheme, then there are no tax or NICs to pay. Because of this, a salary sacrifice arrangement is commonly used when it comes to putting money into a pension.

A salary sacrifice happens when an employee gives up the right to part of the cash remuneration due under their contract of employment. The sacrifice is achieved by varying the employee's terms and conditions of employment relating to remuneration.

Example

An employee's current contract provides for cash remuneration of £15,000 a year with no benefits. If the employee puts £500 of this into a pension, then tax will only be due on £14,500 but NIC will still be due on the £15,000.

Under salary sacrifice, the employee agrees with the employer that for the future the employee will be paid cash remuneration of £14,500 year and that the employer will put the £500 into a pension, tax and NIC free, for the employee. This means that the employee’s tax and NIC will only be charged on £14,500. The employer does not have to pay the 15.05% employers NIC on the £500 cash given up either.

Some employers enrol employees into a workplace pension scheme in combination with salary sacrifice arrangements. Essentially the employee gives up their right to some salary and the employer would make all of the required pension contributions in return – making sure that the minimum total contribution is achieved. See the heading above for more on minimum contributions: How much you will need to pay into a pension.

This type of arrangement can be quite complicated to set up (so you will probably need some professional advice) and may not be suitable in all cases. For example, those on the minimum wage cannot sacrifice salary and while non-taxpayers in relief at source schemes will save National Insurance, they will lose the 20% top up into their pension pot, so could be worse off. However, when appropriate, it can help reduce some of the costs that employers face due to auto-enrolment. A starting point to find out more is to look at the information on GOV.UK.

Errors

Employers sometimes make errors with tax relief on workplace pensions.

In particular, there is huge potential for confusion about the methods for giving tax relief via the payroll on employee pension contributions to workplace pension schemes.

We explained above that there are two ways that an employee’s pension contributions can be taken from their pay, depending on the type of pension scheme chosen by their employer. The explanations can be found under the heading above: Choice of pension scheme and method of giving tax relief.

The apparent misnaming of the two types of relief do not help employers to get things right because:

  • a net pay arrangement (NPA) sees contributions being deducted from gross (before tax) income; and
  • a relief at source (RAS) arrangement sees tax relief reclaimed by the pension provider, not in fact at the source of the contribution – i.e. the employer!

This can lead to the following situations:

  • A contribution is taken from an employee’s pay as if it were under RAS but where the pension scheme is set up as NPA. In this situation, tax will have been overpaid and insufficient employee pension contributions will have been paid into the employee’s pension pot.
  • A contribution is taken from an employee’s pay as if it were under NPA but where the pension scheme is set up as RAS. In this situation, there is double payment of tax relief – once through the payroll and then once when the pension scheme adds the 20%.

Some guidance was published on this topic in HMRC’s August 2023 Employer Bulletin, with some examples of common mistakes. This says that errors should be corrected immediately in terms of future payroll, and that past mistakes should be reported via HMRC’s digital disclosure facility.

To properly identify the nature and extent of any errors and to set things straight, you may need to:

  • Check what type of tax relief your pension is set up to operate and whether this matches what is being done for payroll purposes
  • Try to identify if the errors are NPA to RAS (where tax relief is given twice) or RAS to NPA (where tax relief is not given at all)
  • Contact your pension scheme provider and explain the problem so that they can confirm the nature and scale of the issue. There may not be an issue, for instance, if you are just confused about the type of scheme you have. Equally, the issue may be larger or smaller than first thought depending on whether you are using qualifying earnings or total earnings, for instance, or paying more than the minimum percentage required.

Once you have established the position, you can then take the required action.

More information

For employers new to auto-enrolment there is some basic guidance on GOV.UK.

The Pensions Regulator’s website has a wealth of information that:

  • is designed to meet the needs of employers who may not have pensions experience, including those with just one or two staff;
  • uses everyday language, is interactive and contains videos and graphics so that employers can easily understand what they will need to do;
  • includes a useful Frequently Asked Questions section;
  • provides detailed help guides on various subjects, including 'Employer duties and defining the workforce', 'Postponement', 'Opting out', 'Re-enrolment', and 'Keeping Records';
  • gives contact details so that you can get in touch with them online, by telephone or in writing if you still have questions.

For employees

Your employee may come to you for some guidance on auto-enrolment – for example, should they stay in or opt out? You should not advise your workers on this matter.

You could, however, direct them to free sources of guidance to help them better understand auto-enrolment, for example:

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