Pension auto enrolment – 12 key facts small businesses need to know

Automatic enrolment has become an essential responsibility for hundreds of thousands of small businesses across the UK.

Many small firms are still unfamiliar with company pensions, so tackling auto enrolment (AE) can feel daunting. This guide has been designed to help small business owners understand the subject.

It outlines the key issues for small businesses, including what auto enrolment is, what’s happening, the implications for you and your employees, and the steps you need to take to ensure you comply with the rules.

We also explain why sole traders and many small limited companies are exempt.

What is automatic enrolment?

Automatic enrolment is the UK’s workplace pensions initiative. It makes it a legal requirement for all employers to automatically enrol their employees into a workplace pension and contribute to it. You can find out more about how it works on GOV.UK.

Which businesses have to comply with auto enrolment?

Automatic enrolment began in October 2012 for larger employers. Since February 2018, all employers must comply with the legislation, including those with just one employee.

Even new employers, including those established after 2017, must comply with AE duties from the first day they hire their first employee.

What if you don’t have any staff?

The rules don’t apply to sole traders (by definition). They also don’t apply if you run a limited company and the following apply:

• You are a sole limited company director, with no employees.
• Your limited company has two or more directors, no other employees, and neither director has a contract of employment.
• Your limited company has two or more directors, no other employees, and only one director has a contract of employment.
• Your company has been dissolved, gone into liquidation or has ceased trading.

Why was it introduced

Workplace pension savings had been declining for over a decade. Auto enrolment was introduced to reverse this trend. By harnessing the power of inertia, it is hoped that more UK workers will save for their retirement.

Over 10 million people have been enrolled in a workplace pension, with opt-out rates remaining low, at around 8-9%. This demonstrates that when saving is made simple, most employees participate in pensions.

Auto enrolment applies to all employers. If you start a new business, your AE duties begin immediately when you hire your first employee.

When do new business start-ups need to register for auto enrolment?

New employers must comply with auto enrolment as soon as they hire staff. Follow the excellent advice on the Pensions Regulator website to get started.

What are the pension contribution rates?

The cost of implementing auto enrolment depends on your pension provider choice and current internal systems. Ongoing costs include contributions to staff pensions, which depend on the average salary of the members and the chosen contribution structure.

As of 2024, auto enrolment minimum contributions are:

Date	Employer minimum contribution (% of salary)	Total minimum contribution (% of salary)
Current (since October 2018)	3%	8%

Which employees are eligible for auto enrolment?

Employees are eligible if they:

• are aged between 22 and the state pension age (currently 66) earning more than £10,000 per year must be auto-enrolled.
• are aged between 16 and 74, earning more than £6,240 but less than £10,000 per year, can choose to opt in, and employers will need to contribute if they do.
• earn less than £6,240 per year can opt into a pension scheme, but employers are not required to contribute.
•  earn more than £10,000 but are under 22 or over state pension age are not automatically enrolled but can opt in and receive employer contributions.

Employees can also opt out, but they must be re-enrolled every three years.

How does an employer select a pension scheme?

Choosing the right pension scheme for your business is essential. Consider your needs in terms of costs, benefits, and providers.

The National Association of Pension Funds (NAPF) established the Pension Quality Mark (PQM), which signifies schemes with high governance standards, low charges, and good member communications.

The Master Trust Assurance Framework (AAF 02/07) is another key accreditation that can help ensure the quality of pension schemes.

Not all providers accept all companies, so it’s essential to do your research early to avoid any last-minute issues. Consulting an independent financial advisor or accountant may also be helpful.

The Pensions Regulator has a guide for selecting a pension scheme, available on their website.

What are the ongoing responsibilities of AE?

Your responsibilities do not end once you’ve enrolled your staff. You must continue to:

• Pay regular contributions into the pension.
• Monitor the age and earnings of all staff and new hires to ensure eligibility.
• Process any opt-in, joining, or opt-out requests.
• Keep and maintain accurate records.
• Re-enrol eligible staff every three years.

These duties should become part of your business’s routine processes.

This guide was originally written for ByteStart by Morten Nilsson, CEO of workplace pensions provider NOW: Pensions, which offers a high-quality, low-cost pension designed specifically for the auto-enrolment market. For more information, visit this page of the NOW: Pensions website. The article was updated by the ByteStart team in 2022.

*The earnings threshold is subject to annual review by the DWP