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 dedicated employment law section.
What is auto-enrolment?
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, check whether they’re eligible and 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.
Are all 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 confirm with The Pensions Regulator who they should contact 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 does auto-enrolment begin?
New employers will immediately have auto-enrolment duties. On the first day a person starts working for them (known as their duties start date), the employer should formally assess them 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.
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’ 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.
Can I postpone 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 in to the pension scheme during the postponement period.
You can also use postponement to help you at the very beginning of your auto-enrolment journey.
Let’s look at an 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 as a consequence of receiving 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.
What criteria must my employee meet to be auto-enrolled?
The rules say you must automatically enrol all staff who, on your duties start date:
- 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.
£10,000 a year translates into the following amounts depending on how often you pay your worker:
The Pensions Regulator have a guide to 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 if I don't have anyone I need to auto-enrol?
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.
I have someone I need to enrol, what do I 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 to use 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).
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 templates to help you comply. Some pension schemes or payroll software packages will help you handle the communications.
Once you have set up a pension scheme and put your employee in it, you must tell The Pensions Regulator by completing and submitting a declaration 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).
They have a checklist that 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 and keep accurate records of what you have done. When new workers join, you must auto-enrol them if they meet the age and income thresholds and, every three years, you have to automatically re-enrol employees who have opted out. Again, some payroll software packages will help you carry out these types of tasks.
What if my employee wants to opt out of the pension scheme I have put them in?
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 will I have to pay into my employee's pension?
You will have to pay the minimum legally required level of contributions into the pension scheme you select. The amount 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
The employer contribution rates are as follows and in 2023/24 are set at a 3% employer minimum contribution:
Employer minimum contributions
Total minimum contribution
Since April 2019
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.
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.
You can find more about the costs of auto-enrolment for employers, including set up costs on The Pensions Regulator’s website.
How do I calculate my employee’s contribution?
As stated above, qualifying earnings is a band of earnings used by most employers to calculate contributions. You calculate your employee’s contribution at 4% or 5% of their earnings within that band each pay day (it is 4% or 5% depending on whether your employee is in a relief at source scheme or a net pay arrangements scheme). See the examples Marcie and Jo.
Does my choice of pension scheme affect the tax relief my employee gets?
Depending on how much your employee earns, they may be affected by a growing issue within the auto-enrolment programme. 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.
As a bit of background, 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)
- Under ‘relief at source’ (RAS) arrangements – 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.
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 a few other auto-enrolment scheme providers. However, the vast majority of 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.
My employee’s income varies – how does auto-enrolment apply?
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).
Once they have been enrolled, and assuming they do not opt out, you will then calculate pension contributions each time they are paid, in accordance with the percentage table. You should remember that the percentages only apply to qualifying earnings over £6,240 a year (or the appropriate amount for their 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.
I’ve missed my duties start date – help!
If you have realised you are late meeting your duties, or are struggling with them, you should tell The Pensions Regulator straight away. They will 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 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 one published example of a case where an employer has successfully challenged a penalty on the grounds of reasonable excuse.
Help! I’ve missed an auto-enrolment deadline due to COVID-19 and now have a penalty
Please see the guidance on our dedicated page.
What happens if a worker leaves or I stop being an employer?
What you need to do when a worker leaves your employment of 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. Saying that, 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 below.
If you are using Basic PAYE Tools, you would do this on the ‘Add employee payment’ page. So, carrying on the example of Jo above, her employer 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), you would need to add the employee contribution amounts in to 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.
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 his or her contract of employment. The sacrifice is achieved by varying the employee's terms and conditions of employment relating to remuneration.
For 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 above for more on this.
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 extra costs that employers will face due to auto-enrolment. A starting point to find out more is to look at the information on GOV.UK.
A warning about errors
It is easy for employers to 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.
As we explain above, 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 is deducted before tax is calculated on wages (meaning that employees who earn more than the personal allowance should receive tax relief then and there); and
Under ‘relief at source’ (RAS) arrangements: where 80% of on wages and the pension scheme reclaims basic rate tax relief from HMRC.
Due to the counterintuitive naming, there will be employers who misunderstand what the two tax relief mechanisms mean and get them back to front.
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%.
If an incorrect method of tax relief is being applied via the payroll, it is crucial that you identify this at the earliest opportunity, change the method of tax relief being applied, and consider how to deal with what happened in the past.
Currently, although there is some basic guidance for pension providers, there seems to be no specific guidance available to help employers understand what to do. This is despite the fact that liabilities (either to HMRC or the employee/pension provider) can be significant, especially where the error has happened over many years.
To help us gather evidence of the need for guidance, we would be interested in hearing about any employers’ experiences of such situations. If this is or has been an issue for you, please contact us.
Where can I get further 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. It uses everyday language, is interactive and contains videos and graphics so that employers can easily understand what they will need to do.
There is a useful Frequently Asked Questions section on their website. There are also detailed help guides on various subjects, including 'Employer duties and defining the workforce', 'Postponement', 'Opting out', 'Re-enrolment', and 'Keeping Records'. If you still have questions, you can contact them by email or telephone on 0345 600 1011.
Your employee may come to you for some guidance on auto-enrolment – for example, should they stay in or opt out?
For many workers, saving into a pension scheme is a good idea but things may not be so clear cut if your employee is on a limited budget and/or if they do not get tax relief on their contributions, for example. As noted above, you should not advise your workers on whether or not they should opt out. You could, however, direct them to free sources of guidance to help them judge for themselves.
For example, the Money Helper website has some information for workers which you could direct your employee to.
Our employee section has a page on auto-enrolment for employees.