Pension auto-enrolment – how are contractors affected?

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What is pension auto-enrolment?

Several Governments have warned that the population is not saving enough for retirement, creating growing pressure on the Treasury to provide for the needs of an ageing population. The Pensions Act 2008 was introduced to force employers to offer workplace pension schemes, and to enrol all eligible workers into such schemes (automatic enrolment or AR).

The staging dates for firms to provide such schemes depends on size, starting with the UK’s largest employers in October 2012, until all firms (including the smallest) have joined by 2018. If you work for an umbrella company, you will automatically be enrolled into its pension scheme when you sign up, although you are able to opt out should you wish to do so. If you operate via a limited company you will receive a letter from the Pensions Regulator asking how you intend to comply with the AR rules.

Director (one-person company only)

A sole director of a limited company is not treated as a worker for AR purposes if they do not work under a contract of employment for their company and they do not employ any other workers. The company still receives a staging date notice, but can apply for an exemption. It’s important to do this or risk a potential fine.

Multi Director (e.g. husband and wife)

Directors are treated independently for AR purposes and so the main criteria will be a) do you have a contract of employment with the company and b) is there anyone else working for the firm that has a contract of employment. Typically, the answer is ‘no’ to both and so the rules will not apply. If Directors are viewed as workers, then as long as no other employee works for you under a contract of employment then the rules should, again, not apply. Again, a staging date notice will be issued but an exemption can be obtained.

Company Secretaries

A company secretary would not typically have a contract of employment with the company and usually don’t receive a salary through the company. However, if you do employ 1 or more members of staff over and above, then it would be advisable to have a qualifying AR pension scheme in place. Again, if you believe you are exempt you must apply for the exemption from the regulator.

Different classes of workers

The salary level threshold for auto-enrolment is £10,000 per annum (pro rata), for people aged between 22 and State Pension age – these workers are classed as ‘Eligible Jobholders’.  If you earn between £5,772 and £10,000, you are a ‘Non-Eligible Jobholder’ and you do not have to be auto-enrolled, but a scheme has to be in place as the option to join must be made available. If earnings are below £5,772 (also known as the Lower Earnings Limit) then you are classed as an ‘Entitled Worker’ and again do not have to be auto-enrolled but with this category there is also no obligation on the employer to offer access to an AR scheme.