Employee Pensions

Compulsory Employee Pensions

All businesses, no matter how small, will eventually have to start making pension contributions for their employees. Whether you view this as a good or bad decision probably depends on your political leanings… and whether you are an employer or employee.

When it comes to pensions, many small business owners cannot afford to save for their own retirements, let alone those of their entire workforce… they have a tough enough job paying for all those gold-plated public sector pensions!

So when will these compulsory pensions for employees come into operation and how much will they cost business owners? Firms will be enrolled into the system, starting with the biggest ones in October 2012 (120,000 or more employees) and ending with recent start-ups in September 2016.

For employers with less than 30 employees, the earliest commencement date will be 1st June 2015, depending on your PAYE reference number.

 

How Much Will it Cost?

• During the enrolment period (October 2012 to September 2016) the minimum employer contribution will be 1%.

• From October 2016 to September 2017 the minimum employer contribution will be 2%.

• From October 2017 the minimum employer contribution will be 3%.

The good news, therefore, is that the full brunt of compulsory pensions will not be felt until October 2017.

 

3% of What?

Fortunately, compulsory pensions will not be based on an employee’s entire earnings, but rather a chunk of earnings, known as ‘qualifying earnings’.

For 2012/13, qualifying earnings are those between £5,564 and £42,475 per year. The qualifying earnings limits for future years are currently under consideration.

Based on the current limits, however, employers can expect to be forced to make the following annual pension contributions from October 2017 onwards:

Salary	Pension
£42,475+	£1,107
£40,000	£1,033
£35,000	£883
£30,000	£733
£25,000	£583
£20,000	£433
£15,000	£283

So, if you have 20 employees earning £25,000 each, your wage bill will increase by £11,660 per year.

 

NEST

A state-sponsored pension scheme called NEST (National Employment Savings Trust) will be made available to employers, especially small employers, who do not have their own pension scheme.

 

Employees Can Opt Out

Employees will be automatically enrolled but this can be postponed by up to three months. The three month period is designed to make life easier for businesses that employ lots of temporary and seasonal workers.

It’s important to point out that employees can opt out of compulsory pensions. This crucial fact is often brushed under the carpet in most discussions of the subject.

However, we predict that young people will opt out in their thousands, much to the dismay of the bureaucrats who have spent so many years setting up this white elephant.

You see it’s not just employers who are going to be forced to make pension contributions. Employees will also have to put money in and their contributions will be even higher than their employer’s (5% from October 2017, albeit with 1% coming from the taxman).

If the country’s current saving culture is anything to go by, many employees will choose to spend their earnings rather than save for the future, especially those in their twenties, thirties and forties, faced with paying off student loans, climbing the housing ladder and bringing up children.

In short, the easiest way for employers to avoid compulsory pension contributions may simply be to inform their employees that they can opt out if they want to. Care must be taken, however, as employers are prohibited from inducing or encouraging employees to opt out.

If the employee opts out, the employer doesn’t have to make any contributions.