October 18, 2023
The UK auto-enrolment scheme requires employers to enrol all eligible employees to a workplace pension scheme automatically. Read on to learn how it works.
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The auto-enrolment pension scheme in the UK provides employees with easy access to a workplace pension plan.
It was rolled out in stages from 2012 to 2018 — starting with large employers and followed by medium and small employers. Since 2018, all UK employers have been legally required to auto-enrol their eligible employees into a qualifying pension scheme.
Let’s explore the UK’s automatic enrolment scheme in detail.
As per the auto-enrolment legislation, every UK employer (regardless of the number of staff) must auto-enrol eligible employees in a workplace pension plan and contribute to it.
Employees are also required to make contributions towards their pension plan, which the government then tops up in the form of tax relief.
Before going any further, let’s first briefly talk about qualifying earnings.
What are qualifying earnings?
The UK government has set a lower and upper limit on all employee earnings, known as “qualifying earnings”, to calculate pension contributions for the auto-enrolment scheme. This band ranges between £6,240 - £50,270 a year.
(More on this later in the article - under pension contributions.)
For auto-enrolment, workers are classified into three categories based on earnings and age:
Entitled workers: Workers aged between 16-74 ordinarily working in the UK under employment contracts and earning less than the qualifying earnings, i.e., £6,240.
Eligible jobholders: Workers aged between 22 and the State Pension age (66 as of 2023), having qualifying earnings.
Non-eligible jobholders: These workers aren’t eligible for auto-enrolment but can opt-in voluntarily. This category includes workers who are either:
Aged between 16 and 74 and earn between £6,240 to £10,000 a year. OR
Aged between 16 to 21, or between State Pension age and 74, earning over £10,000 per year.
Employers will check which category an employee falls into and decide whether they qualify for automatic enrolment into a workplace pension scheme.
How is the eligibility determined?
Let’s find out next.
Your employer must auto-enrol you in a workplace pension scheme if:
You will be classed as a ‘worker’ if you meet these conditions:
You have a written or unwritten contract to do work or provide services for a monetary reward or a benefit in kind.
You have a limited right to subcontract your work, i.e., send someone to do the work for you.
Your employer can provide work as long as your contract lasts.
You’re not providing services or working for someone as a company, i.e., they are not your customer or client.
Your State Pension age is when you can start receiving your State Pension. Your State Pension age may depend on your gender and when you were born, but it typically ranges from 66 to 68.
You can determine your State Pension age with this calculator.
You need to have an annual income of at least £10,000 — which equates to £833/month, £192/week, or £769 every 4 weeks — or you won’t qualify for auto-enrolment.
If your annual income is below £10,000, you’re still entitled to enrol, but it won’t be automatic.
You can opt in as a ‘non-eligible jobholder’ if you earn between £6,240 and £10,000, and your employer must contribute.
If you make less than £6,240 annually (which is £520/month, £120/week, or £480 every 4 weeks), you can opt in, but your employer doesn’t have to contribute.
If your work requires you to be on location within the UK, you’re eligible for auto-enrolment. It doesn’t matter whether you take occasional trips outside the UK or are a UK national.
Does a significant part of your work happen outside of the UK?
You’ll need to determine if you’re considered to be working “ordinarily” in the UK.
For example, seafarers or international aircrew may be considered as such despite spending much of their work time outside the UK.
It largely depends on whether you’re a UK resident and, if you are, where your employment base is. This is determined by looking at:
Where you begin and end your workday.
Where your headquarters are located.
The currency in which you receive your salary.
Whether you pay UK taxes and/or National Insurance contributions.
If you’re on offshore employment in the UK territorial waters, you’re also considered as ordinarily working in the UK.
You’ll get auto-enrolment scheme coverage regardless of your employment type (temporary or part-time worker) if you fulfil all the automatic enrolment requirements. In case you don’t meet the eligibility criteria — for example, if you don’t earn £10,000 a year — you can join the auto-enrolment scheme when your salary increases.
Even if you meet all the above criteria, your employer still wouldn't have to auto-enrol you into the pension scheme if:
You had opted out of your employer’s pension scheme 12 months before your company’s staging date.
A staging date is a specific date the government sets by which an employer must have their workplace pension scheme in place and begin automatically enrolling eligible employees.
You’re quitting your job and have given notice of your resignation, or your employer has notified you that your employment will be terminated.
You’ve received a winding-up lump sum payment after your workplace pension scheme was wound up, then resigned and returned to the same employer within 12 months.
Your employment status is classified as “Director,” and you have at least one employee or staff member working for you. (If you do additional work unrelated to being a director, you may still be entitled to auto-enrolment.)
You’re in a Limited Liability Partnership (LLP).
You belong to an EU member state and are enrolled in an EU Cross-Border Occupational Pension Scheme. (UK residents on an EU cross-border scheme before Brexit should have been moved to a UK-based auto-enrolment scheme.)
You have documents that indicate you have availed of the Lifetime Allowance protection.
The Lifetime Allowance protection limits the total pension benefits you can accumulate throughout your lifetime. It also includes benefits obtained from workplace pension schemes.
The Lifetime Allowance as of 2023 is £1,073,100. You can generally claim 25% of the amount in your personal pension pot as tax-free cash.
Individuals receiving Lifetime Allowance protection from the government are protected from income tax charges and are thus not given any further tax relief. Employers can choose not to auto-enrol such employees.
In the UK, employers are responsible for ensuring that they comply with the auto-enrolment law and help their employees save for retirement.
There are two types of workplace pension schemes available in the UK – defined contribution and defined benefit pension schemes.
Employers must set up a workplace pension scheme and automatically enrol each eligible employee into the chosen pension plan.
Learn more about workplace pensions in the UK.
Are you a UK employer planning to set up a workplace pension scheme?
Kota is a digital pension platform that lets you effortlessly provide a workplace pension scheme to your UK team.
We've partnered with Smart Pension, a trusted pension provider in the UK, to help you set up auto-enrolment and manage pensions compliantly from anywhere in the world.
Kota lets you:
Easily enrol your UK-based employees into a workplace pension scheme within minutes.
Comply with the UK automatic enrolment laws and make a minimum contribution to your employee's pension pot.
Delay auto-enrolments for a maximum of three months, with the option to establish automatic postponement for your team.
Efficiently handle re-enrolments every three years based on how you make your pension contribution.
Join Kota to set up affordable and scalable workplace pension arrangements compliant with the UK’s auto-enrolment legislation.
Employers must provide employees with all crucial information about the auto-enrolment scheme in writing no later than six weeks after the auto-enrolment duties start date.
This information includes details about:
How the scheme affects them.
Employee’s date of enrolment.
The type of pension scheme they’re enrolled in.
The pension providers, trustees, and managers of the scheme.
Employee and employer contribution.
The opt-in, opt-out, and re-enrolment process.
Employees and employers must make minimum contributions towards the workplace pension scheme in auto-enrolment. (We’ll cover these contribution rates later in this article.)
The employer must ensure employee contributions are deducted from their payroll and added to their pension fund.
Employers must maintain accurate records of all auto-enrollment activities. These records can be used as proof by employers during compliance declarations.
Employers must maintain two types of records that should be kept for at least six years.
Records about Jobholders and Workers: This includes employee information such as their name, national insurance number, opt-in, and joining notice.
Records about the Pension Scheme: This includes information about the type of pension scheme offered by the employer and the name and address of the pension provider.
Employers must inform the Pensions Regulator (TPR) once they have fulfilled their automatic enrolment duties.
To do so, employers must submit an online declaration of compliance on TPR's website within five months from their duties start date.
Sometimes, employers can postpone your automatic enrolment for up to three months.
This usually happens if you're a short-term employee, like a seasonal worker.
Employers can postpone automatic enrolment in the following circumstances:
Duties Start Date: Employers can delay enrolment from the date when their automatic enrolment duties officially begin.
Employee's First Day of Employment: Enrolment can be postponed from the first day a new employee starts working for the company. For example, if you’re on probation.
Employee Doesn’t Meet Eligibility Criteria: Employers can postpone enrolment until an employee reaches the required age and earnings level.
If your employer chooses to postpone your enrolment, they must notify you with a proper explanation in writing.
Your employer can’t:
Fire you from your job or discriminate against you for joining a workplace pension scheme.
Force or advise you to opt out of the workplace pension scheme.
In an auto-enrolment pension scheme, both you and your employer contribute towards the pension scheme. You also get contributions from the government in the form of tax relief.
Under the auto-enrolment legislation (Pensions Act 2008), the government has set the minimum contribution levels at:
5% minimum for employees.
3% minimum for employers.
You can only pay the minimum contribution of 5% if you earn between £6,240 and £50,270 per year (for tax year 2023-24). This portion of your income is known as your 'qualifying earnings.'
Your qualified earnings can include the following:
Gross salary or wages from overtime.
Bonuses and commissions.
Statutory sick pay, maternity, paternity or adoption allowance.
Despite these limits, employers and employees can make higher contributions toward the pension fund if they wish to.
Employers are not legally required to match employee contributions in the UK.
Your employer also doesn’t have to contribute towards your pension scheme if your income is equal to or less than:
£520 a month.
£120 a week.
£480 over four weeks.
Your employer is responsible for selecting a suitable pension provider to manage your pension contributions.
The pension provider will invest your money into stocks and shares to grow your pension fund until you retire. Any growth within your pension fund is not subject to taxation, but it's important to note that the value of investments can rise and fall.
The final amount you receive at retirement depends on your total contributions and your assets' performance.
If you’re enrolled in a workplace pension scheme, you get tax relief from the government when you make pension contributions.
There are two methods to get tax relief on your pension contributions:
The Relief at Source: Your employer deducts your pension contributions from your post-tax income. While 80% of your pension contributions are taken from your salary, your pension provider reclaims the remaining 20% as tax relief from the government and adds it to your pension fund.
The Net Arrangement Pay: You get tax relief immediately at the highest tax rate in the net pay method. Your employer will deduct pension contributions from your income before it’s taxed. This means you’ll only pay tax on your earnings minus your pension contribution.
No, joining an auto-enrolment pension scheme isn’t optional because employers must legally enrol each eligible worker into a workplace pension scheme.
However, you do get the option to opt in and out of their workplace pension scheme.
You can opt out of your employer’s workplace pension scheme if you’ve been auto-enrolled into one by giving them an opt-out notice.
Here’s how it works:
You get a one-month window to decide whether to 'opt out’ or stay in the scheme. If you opt out, you must submit a valid notice to your employer.
If you opt out within one month, your employer will refund any contributions you have made towards your pension pot.
However, if you opt out after one month, the contributions you've already made usually stay in your pension account.
Opted out but looking to rejoin the pension scheme?
Follow these steps:
Request your employer to re-enrol you in the pension scheme. However, your employer might allow this only once every 12 months.
Provide your employer with an opt-in notice. Once the employer receives this notice, they must arrange for the jobholder to become an active member of an automatic enrolment scheme from the enrolment date.
You can’t opt out of your employer's auto-enrolment scheme forever because even if you don't ask them to re-enrol you in a pension scheme, they are legally required to re-enrol you in a qualifying pension scheme every three years. This is known as re-enrolment.
Here are a few reasons to join an auto-enrolment scheme instead of opting out:
Automatic enrolment in a qualifying workplace pension scheme lets you make regular pension contributions towards your pension pot.
As you contribute a portion of your salary towards your pension pot throughout your work life, you collect enough to sustain yourself in retirement.
Having a workplace pension arrangement is also important because relying only on the State Pension, which is just £203.85 a week as of 2023, may not be sufficient to manage your retirement expenses.
In an auto-enrolment pension scheme, your employer contributes towards your pension fund, and you get tax relief from the government.
Government and employer contributions are essential because they enhance your retirement savings, reduce your tax liability, and provide greater financial security in your retirement years.
Auto-enrolment makes it easier to switch jobs because your pension savings are independent of your employment.
When transitioning between jobs, your auto-enrolment pension savings move with you.
So, if your new employer offers a different pension scheme, you can contribute to the new plan while your previous pension fund continues to be invested as it was before.
Still have some questions about the automatic enrolment scheme?
We’ll answer them.
Yes, you can be enrolled in multiple workplace pension schemes if you work for more than one employer.
Each employer will separately determine your eligibility to join their pension scheme (based on the eligibility criteria covered earlier in the article).
If you are eligible for pensions with multiple employers, you will be automatically enrolled in the relevant workplace pension schemes. You can choose to opt out if you want.
You can opt-in voluntarily if you’re not qualified to be auto-enrolled but still want to join a workplace pension scheme.
However, your employer may or may not contribute towards your personal pension pot, depending on whether you’re a “non-eligible jobholder” or an “entitled worker.”
If You’re a “Non-eligible Jobholder”: Your employer must contribute towards your pension fund at the minimum contribution level of 3%. However, they can increase the pension contribution if they want to.
If You’re an “Entitled Worker”: Your employer isn’t obligated to contribute towards your pension fund, but they can if they wish to.
Auto-enrolment is available for all employees, including temporary, part-time, and seasonal workers.
So, even if your income varies, your employer must enrol you in a pension scheme if you meet or surpass the age and income thresholds.
Once enrolled, your employer will calculate your pension contributions based on your ‘qualifying earnings,’ i.e., an amount over £6,240 at each pay period.
This means that on some paydays, you might earn enough to make pension contributions, while on some days, your earnings may be lower, and you won’t be able to make any contributions.
As per the UK auto-enrolment law, your employer must assess your eligibility when you join their organisation.
If you’re not auto-enrolled because you didn’t meet the eligibility criteria, your employer has to assess your eligibility every pay period (i.e., weekly or monthly, depending on your job) till your earnings increase to above £10,000 a year.
Similarly, if you were under 22 when you joined the company and weren’t added to a workplace pension scheme, your employer will automatically add you to one when your age increases.
If you can’t afford to contribute towards your pension fund, you can opt out of the scheme and rejoin later when your income levels increase.
You can also talk to your employer about reducing your contributions.
However, you can only reduce your contributions below the minimum 5% if your employer agrees to increase their contributions by more than the required 3% to make a total contribution of 8%.
As the government has established minimum contribution thresholds, any contributions to the pension fund below 8% will not be considered.
If your employer doesn’t comply with automatic enrolment rules and legal duties, the Pensions Regulator (TPR) can take enforcement action against them, and they’ll have to pay a hefty fine.
The Pensions Regulator (TPR) sends official notices to employers in case of non-compliance with automatic enrolment rules.
If the issue persists, penalty notices may be issued, and the TPR can take legal action against them.
The UK auto-enrolment scheme was introduced to address declining workplace pension provisions in organisations, due to which workers could not save for retirement.
Since 2012, the percentage of eligible private sector employees enrolling in pension schemes has surged, jumping from 44% to an impressive 86% in 2021.
So, if you need to manage pensions for your UK team, just use Kota.
You can easily set up a workplace pension scheme that complies with the UK auto-enrolment law without the hassle of brokerage and administrative costs.
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