Earlier this year we talked about pensions and auto-enrolment and covered a number of topics including the legal and compliance requirements under the Pensions Act 2008; the cost to a business of running a pension scheme; and the benefit to the employee from being in the scheme. Before we proceed, make sure to revisit our previous introduction to this topic; it’s a worthwhile read brimming with insights you wouldn’t want to miss!
With that knowledge under your belt, the next step is navigating the world of pension schemes which can be quite daunting and, in general, is not always very well explained online. You can of course appoint professional advisors to assist you here but it will not be cheap and without going through the process yourself, explaining pensions to staff can be tricky.
Eligibility
Not all pension providers will be available to you. Some will have qualifying criteria around numbers of employees or average earnings; however many will accept any size of business. Two key things to ensure are that the scheme includes auto-enrolment and it is regulated by the FCA. All of the ‘big names’ tick all of the relevant boxes so for smaller and new businesses it almost certainly makes sense to go with one of these.
Tax relief
There are two ways in which staff receive tax relief – ‘Relief at Source’ (RAS) and ‘Net Pay Arrangements’ (NPA). The basic distinction is that RAS takes pension contributions after PAYE has been calculated, and NPA takes it before. The reason this matters is primarily where there are staff members who do not pay any tax because they earn above the national minimum wage but below the taxable threshold.
For many businesses, NPA will be the right choice, however if you employ a lot of lower paid employees, RAS makes more sense. As you are unable to mix the methods within the same pension scheme, the make up of your workforce should drive which method you go with.
Salary sacrifice
Regardless of whether you use RAS or NPA, you may wish to allow employees to contribute to their pension using salary sacrifice. As with any other salary sacrifice arrangement, the employee saves both tax and national insurance, however the employee has a lower reportable salary which may impact their ability to successfully apply for a mortgage, loan or pass a tenant credit check. Not everyone will want to contribute to their pension via salary sacrifice, but the option should be made available where possible.
The employer also saves national insurance under a salary sacrifice scheme. As of writing, for every £1 that an employee contributes to their pension pot, the employer saves 13.8p of NIC. Many employers choose to pocket this saving, but the good ones will choose to pass on some, or all, of it by adding it to the employee’s regular pension contributions to give their overall pot a nice boost.
Which scheme?
Once you have decided how the contributions will be made, choosing a pension scheme comes next. Large providers such as NEST (not-for-profit administered by the government’s DWP) and People’s Pension (private not-for-profit regulated by the Pensions Regulator) make signing up simple and will take care of all of the documentation that you need to send to staff as they enrol. They will also take care of any postponement rules you may wish to implement which is very common for new staff still in their probationary period. Ultimately, if you are looking for something standard which will guarantee compliance with little input required from yourself, the large providers are a good choice. Fees are fairly standard across the board so preference may simply come down to how easy you find their website / app and perhaps consultation with your employees to assess their preferences.
Key resource
The Pensions Regulator was set up by the government to provide guidance and the website is clear and simple to navigate. There are some useful step by step guides in the section for employers to help you work out when you have to register a pension scheme.
Summary
Pensions are not nearly as difficult to set up an administer as they once were and after a few initial decisions in the best interests of your company and staff, the rest follows easily. The big providers will ensure that you are always compliant and a good pension scheme can be a great way to both entice and retain valuable members of staff.
Get started today:
- Sign up with a pension scheme provider;
- Tailor the scheme to your requirements (eg the % rates you will pay);
- Enrol your staff into the scheme and communicate this to them; and
- Deduct pension contributions in your next payroll and make monthly contributions to the new pension provider.