
The Auto-Enrolment burden of workplace pensions will be forced on even the smallest business between now and the end of 2017.
Auto-enrolment sounds great, “we’re in” rings from the TV publicity. But it can be heart ache for small businesses that can ill afford such a financial burden.
For career politicians that have never had a proper job, it’s fabulous to come up with these great ideas to encourage pension savings. This perhaps opens up an opportunity for the Government to release it’s State pension responsibilities in the future and pass that responsibility onto employers.
Indeed, for small one person businesses, it can well discourage them to expand and take on their first employee.
Let’s look at the costs for both the employee and employer:
| | |
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Date | Total Minimum Contribution between Employee & Employer | Minimum Employer Contribution |
From staging date up to Sept 2017 | 2% of qualifying earnings | 1% of qualifying earnings |
| 2% of total pay | 1% of total pay |
| 3% of basic pay | 2% of basic pay |
Oct 2017 to Sept 2018 | 5% of qualifying earnings | 2% of qualifying earnings |
| 5% of total pay | 2% of total pay |
| 6% of basic pay | 3% of basic pay |
Oct 2018 onwards | 8% of qualifying earnings | 3% of qualifying earnings |
| 7% of total pay | 3% of total pay |
| 9% of basic pay | 4% of basic pay |
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By law you must pay at least the minimum employer contribution in the last column above with the employee making up the difference between that figure and the total minimum contribution in column 2.
I have defined ‘qualifying earnings’, ‘total pay’ and ‘basic pay’ further down this post.
Let us look at a scenario of a small business with one employee earning £288 basic pay for a 40 hour week (£7.20 an hour National Living Wage). The following table shows the minimum annual contributions that have to be paid:
| | |
---|
Date | Total Minimum Contribution between Employee & Employer | Minimum Employer Contribution |
From staging date up to Sept 2017 | 2% of qualifying earnings £183.04 | 1% of qualifying earnings £91.52 |
| 2% of total pay £299.52 | 1% of total pay £149.76 |
| 3% of basic pay £299.52 | 2% of basic pay £299.52 |
Oct 2017 to Sept 2018 | 5% of qualifying earnings £457.60 | 2% of qualifying earnings £183.04 |
| 5% of total pay £748.80 | 2% of total pay £299.52 |
| 6% of basic pay £898.56 | 3% of basic pay £449.28 |
Oct 2018 onwards | 8% of qualifying earnings £732.16 | 3% of qualifying earnings £274.56 |
| 7% of total pay £1,048.32 | 3% of total pay £449.28 |
| 9% of basic pay £1,347.84 | 4% of basic pay £599.04 |
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On op of the employer contribution, the business owner will also have to pay the costs of running auto-enrolment. Unless they do it themselves and risk heavy penalties, they will have to use a payroll bureau. Most, if not all, payroll bureaus will insist on doing both the normal payroll and auto-enrolment as one without the other is destined for disaster!
So, a small employer with one weekly paid employee forced into using a payroll bureau because of auto-enrolment may incur the following typical additional costs:
Payroll processing at £16.50 per week plus £22.00 year end processing = Total £880.00 per year
Auto-enrolment processing £31.50 per month = £378.00
Total costs before any contribution to Auto-Enrolment pension scheme £1,258.00
What goes into the pension fund based on employee working 40 hours a week at 7.20 (£14,976 PA):
Annually up to Sept 2017 – £449.28
Annually up to Sept 2018 – £898.56
Annually from October 2018 – £1,347.84
You do the sums, it costs the employer nearly as much in extra overhead after October 2018 as goes into the pension pot.
There may also be a £35 or more set-up fee for each employee and some pension providers like The Peoples Pension are charging the employer a £500 set-up fee. I know NEST Pensions are not making a set-up charge to employers yet. With set-up charges, ongoing processing charges etc, small employers are being hammered with extra employment costs many cannot afford.
Possible extra burden for the small employer with one weekly paid full-time employee on National Living Wage after October 2018 is £1,857 before set-up costs and all that goes into the employees pension scheme from the employer (before pension fund management charges) is £599. It costs the small employer with one employee as above £1,258 more than the employer contributes.
This really is a true burden on small businesses.
Let’s define the terms ‘qualifying earnings’, ‘total pay’ and ‘basic pay’:
‘Qualifying earnings’ is the name for a band of earnings you can use to calculate pension contributions. For the 2016/17 tax year, it’s all an employee’s earnings between £5,824 and £43,000.
‘Total pay’ means all payments made to a worker, including their salary/wages, plus any commission, bonuses, overtime and so on.
‘Basic pay’ means a worker’s salary/wages and statutory payments like sickness and maternity pay, but it excludes commission, bonuses, overtime and so on.
Employers and employees can pay more than the minimum contribution but the upper limit depends on your pension fund provider.
For more information on what you need to contribute, visit The Pensions Regulator relevant web page.
Disclaimer
The above is not exhaustive and is for guidance only and you should consult your accountant or other professional adviser before taking action on any of the above. See the Disclaimer