We’re often approached by company directors who are wondering whether the new workplace pensions laws affect them. As you would expect with pensions, the answer isn’t a straightforward ‘yes’ or ‘no’. Pensions are typically complicated, and the rules relating to the treatment of directors are, unfortunately, no exception.
Does my business need a pension scheme?
If you’re a sole director of a limited company, it’s pretty straightforward – you have no employees and it’s just you running the business on your own. If this is you, then you won’t need to set up a pension scheme as you’re not an employer. However, you do still need to tell The Pensions Regulator that you are not an employer before your auto-enrolment deadline, or Staging Date, to avoid a fine. You can do this online via the Regulator’s website.
As soon as you take on your first employee you’ll have a new staging date from which to set up a workplace pension. If you take on the employee before February 2018, your staging date will be between May 2017 and February 2018. If your employee joins after February 2018, you’ll have just four-to-six weeks to set up a scheme.
If there’s more than one director in the business or employees come into the mix, then things start getting complicated! It all boils down to employment contracts (written, verbal or implied). For example, if there are two or more directors, but none of you have a contract of employment, then you won’t need to be auto-enrolled. However, if you do have employees then you’ll still need to set up a workplace pension scheme for them and enrol them into it.
If you do have an employment contract and there is at least one other person who has a contract, be it a director or an employee, then you will be classed as a ‘worker’ for auto-enrolment. If you meet the age and earnings criteria, you will need to be enrolled, so you’ll need to have a scheme in place.
There is an important exception here for individuals who are lucky enough to have put away significant pension savings (around £1.25m to £1.5m or more) and have either Primary, Enhanced, Fixed or Individual Pension Protection in place. If this is you, you can be excused from auto-enrolment, and in some cases you really mustn’t pay any further contributions to a pension scheme. If pension protection affects you, be sure to have a chat with your financial adviser before being auto-enrolled.
Nominating a Primary Contact
Once you’ve established that you need to set up a scheme, and you know your staging date, the next step is to nominate a Primary Contact with The Pensions Regulator. The online process is quick and easy. The Regulator has been writing to businesses about this for the last nine months, so you should already have received your letter.
The Primary Contact must be the business owner or a director because the purpose of this registration is that the Regulator can then remind business owners and directors of their legal duties. There’s an option to add a Secondary Contact and this should be your payroll administrator, or the person nominated to deal with auto-enrolment at your company. If you haven’t already nominated a Primary Contact with the Regulator, visit The Pensions Regulator’s website and follow their instructions.
Already in a scheme?
Many directors will already have a pension scheme in place for themselves, but not their employees, perhaps via a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS), or a good quality commercial provider. Even so, you may still need to jump through the auto-enrolment hoop as a director because the chances are your existing scheme isn’t a qualifying scheme for auto-enrolment purposes (as charges tend to be too high).
So, if you’re eligible for auto-enrolment then you’ll need to be enrolled into the new workplace scheme like everyone else, then opt out if you don’t want to stay in. These days you can pay into as many pension schemes as you like, so you can continue contributing to both schemes if you want to.
A family business…
Many directors are a husband and wife team, with no employees. Typically then, the directors will pay themselves just below the NI threshold (currently £671 a month) through PAYE and top up their income through dividends. Dividends don’t count towards your auto-enrolment earnings, so if you both have employment contracts then you’ll fall into the ‘non-eligible jobholder’ category, with annual earnings between £5,824 and £10,000.
In this instance, you’ll need to have a chat to each other over dinner to determine whether either of you want to opt-in to a workplace pension scheme. If the answer’s ‘no’, then you don’t have to set up a scheme. But, by law you still need to write a letter at your staging date, from the company to each of you, asking yourself if you want to opt in and keep the letter for 6 years! And, don’t forget that you’ll still need to do your online declaration of compliance with the Regulator because technically your company is still an employer.
If neither of you has a contract of employment, then you fall outside of the legislation.
The buck stops with you…
As a company director, you are wholly liable for getting auto-enrolment right, whether or not you rely on others to deliver your pension scheme or your payroll service. Get it wrong and your company will be fined. Ignore the law and you, personally, can even face criminal prosecution.
The Pensions Regulator doesn’t want to be heavy-handed, but equally it has a duty to enforce the legislation and if the latest compliance statistics are anything to go by, the Regulator isn’t shying away from enforcement.
As the government’s new campaign says: “Don’t ignore the workplace pension.”
About Sarah Withers
Sarah set up the Auto-Enrolment Bureau to help smaller employers comply with their auto-enrolment duties. Her approach is driven by what a business needs in order to get them through this complex and time-consuming project, so that they end up with a sensible, joined-up solution.
The Auto-Enrolment Bureau is a 'one-stop shop' for smaller employers facing their auto-enrolment challenge, combining quality advice and administration with (if needed) a payroll solution and communications package. We make auto-enrolment easy and affordable for small businesses. We aim to save businesses time and money (and probably much frustration!) because we'll do all of the work on their behalf.
If you think you might need to set up a scheme, or would like to talk through your circumstances, please give us a call on 0800 160 1233. We’ve got lots of useful information and guidance on our website if you need it.