Do You Employ Anyone?

New Pension Regulations That Affect You

If you employ anyone at all, even if it's your spouse and irrespective of whether or not you already have a company pension scheme in place, you need to be aware of new employer pension regulations and take appropriate action.

NEST or National Employment Savings Trust is a pension scheme being introduced in 2012 as part of the Government’s Workplace Pension Reform set out in the Pensions Act 2008.

Why does NEST affect you?

NEST Simple, Low Cost Employer Pension Scheme To Save For RetirementNEST is a simple, low cost pension scheme designed to encourage lower to middle income earners to save sufficient amounts for their retirement through their employer.

If you employ anyone who is not already in a pension scheme (NHS or Personal) and who meets the eligibility criteria (see below), you will have to automatically enrol them into the NEST Pension Scheme. Even if you have a current scheme in place, you need to check it is compliant with the new rules.

Whilst tax deductible as a business expense, the new pension regulations will still cost you money as an employer.

It’s something you have to do, it will be regulated and all of the detail is important. Those who don’t comply will be fined. Even if you try to persuade your employee(s) not to join the scheme, this will be seen as contravening the rules.

When is NEST being introduced?

There is a sliding timescale depending on the size of the company, starting with the largest employers in October 2012.

For employers with less than 50 employees, NEST or a similar qualifying scheme has to be in place by between 1st June 2015 and 1st April 2017, depending on the company’s PAYE reference letters.

These dates may, however, change in future legislation with further confirmation expected in 2013.

How does NEST work?

Employers will, by law, have to auto-enrol all eligible employees into the NEST Pension Scheme, manage the employees’ contributions and themselves make contributions to it.

An eligible employee is someone who is:

  • Aged between 22 and State Pension age
  • Earns more than £7,475* gross a year
  • Not already in a pension at work scheme

Those aged 16-21 or over the State Pension age are not required to be auto-enrolled but they can ask to join the scheme.

If you’re self-employed or a single person director, you are not eligible for auto-enrolment but you will be able to join NEST.

What are the contribution levels?

NEST Pension Scheme Contribution Levels for Employer and EmployeeThere is a minimum total percentage that has to be contributed into the pension scheme. This is made up of 3 sources: employer contribution, employee contribution and tax relief.

The minimum will start at 2% and increase to 8% by October 2018.

As part of this overall percentage, there is also a minimum percentage that has to be contributed by the employer. This will start at 1% and increase to 3% by October 2018.

The Government has allowed for a phased approach to introducing these minimum contributions as detailed in the table below:

Minimum Employee
Minimum Employer
Minimum Total
By October 2017 1% 1% 2%
October 2017 - October 2018 3% 2% 5%
From October 2018 5% 3% 8%

† The employee contribution is gross of tax relief.

For companies employing less than 50 people, the 1% employer contribution has to be increased to 2% by 1st October 2018.

The above minimum percentages only apply to what is earned above £5,715 and up to £37,500 including bonuses, overtime and commission.

The pension contribution is not optional for the employer. If the employee wants to join the scheme, then it’s compulsory for the pension scheme to be offered and for the employer to contribute.

Do employees have to join?

Whilst it is compulsory for employees to be enrolled, it is not compulsory for them to join.

Employees can choose to opt out of the NEST Pension Scheme and make no contributions. This will need to be documented by the employer and the opted-out employee asked to join the scheme every 3 years.

Can the employee or employer contribute more than the minimum?

Employers and employees can pay more than the respective minimum contributions required.

If the employer pays more, the employee can choose to reduce their own contribution as long as the total minimum contribution requirement is met.

So what’s good about it?

Whilst it may add another compulsory cost to your business, there are advantages to employers offering the scheme. Staff benefit and increased loyalty are just two.

Even if you employ say, for example, your spouse, it makes good sense to make a pension contribution as an employer on their behalf over and above the minimum. The advantages for doing this are two-fold:

  • Benefits of NEST Employer Pension SchemeIf you are a 40% or 50% taxpayer, any business expense is deducted from your taxable pay and thereby saving you 40% or 50% in tax due.
  • If your spouse has no other significant pension savings, then there will only be 0% or 20% due in tax when the pension income is taken. 

With constant changing legislation, dealing with the new employer pension legislation now will make your life easier in the future.

If you’re ahead of the game and you start putting NEST compliant pension provisions in place sooner rather than later, it will be one less headache you’ll have to cope with in the next few years.

Early action also allows you to integrate the pension contribution with pay increases at the same time, making it easier for business and financial planning.  By combining the two, you won’t have staff pay increases over the coming years and then an additional payment for the pension in the year the rules apply to you.

Article by Ranjit Virk
Independent Financial Adviser to Doctors and Dentists
Legal & Medical Investments
February 2012

* The current personal allowance
Sources: Pensions Policy Institute and Directgov 

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