Small Business Pension FAQs

For employers not yet used to running a small business, payroll contains many unanticipated challenges. This week, after a conversation with a client local to the office, we decided to handle some of the most common questions inherent to setting up and running pension schemes as a small business. It’s possible that as you read this you’ll think of some oddity not covered here. As always if you believe yours may be an edge case, we recommend you contact us to have a discussion about your specific circumstances.

What’s the Minimum Number of Employees for a Pension?

While this question comes up a lot, the answer is: one. Your first eligible employee must be enrolled into a pension scheme, and the scheme should ideally have been set up before they start working for you. However, if that first employee earns £6239 or less per annum, whether or not you pay employer contributions into the pension is optional.

What Makes an Employee Eligible?

Employees are eligible and must be enrolled into your pension scheme if any of the following are true:

• They are between 22 and 66 (current state pension age)
• They earn more than £10,000 per annum
• Neither of the above are true but they have requested to be put into a pension scheme

What Obligations Do You Have to Employees Outside the Scheme?

It’s your responsibility to monitor whether that eligibility changes. This is as simple as tracking age and annual earnings. Non-eligible employees who are about to become eligible must be informed in writing of when they will become eligible and what will happen when they do. Lastly, you’ll need to carry out a declaration of compliance to be submitted to the Pensions Regulator. For more on this, see the Regulator’s own guide here.

What Do I Tell Eligible Employees?

Eligible employees must be told in writing what being on your pension scheme means for them. For the most part, your pension provider will handle this for you.

How Much Are Employers’ Contributions to a Pension Scheme?

The legal minimum employers’ contribution to the pension scheme is currently 3% of an employee’s qualifying earnings between £6240 and £50,270 per annum. These figures are reviewed annually, so be prepared for them to change periodically. Qualifying earnings include salary, commission earned, and bonuses and overtime paid, as well as statutory pay for maternity, paternity, adoption, or sick leave. Many businesses in the UK offer pension matching, where they pay 5% of salary (the figure the employee pays) as a tool to help retain employees, although this is relatively uncommon in small businesses.

When Are Payments Due?

Pension contributions must be paid by the 22^nd after the month following the paycheque. The amount due should be calculated when payroll is run, so you’ll always know what to pay well before it’s due.

What Do I Need to Know About Pension Tax Relief?

Tax relief is earned on the tax that would have been owed for their pensions. This relief is based on the highest rate of income tax paid, but the pension annual allowance provides a cap on this relieve. This cap is £60,000, or if your salaried income is less than that, the cap is set at 100% of your income. To answer any other questions or to enrol in our outsourced payroll service, get in touch.