The Small Business Guide to Auto-Enrolment Pensions

If you employ anyone in the UK — even just one person — you have legal obligations around workplace pensions. Auto-enrolment requires employers to automatically enrol eligible workers into a pension scheme and make contributions. The rules are not optional, and non-compliance can result in fines from The Pensions Regulator.

For many small business owners, auto-enrolment feels like an unwelcome burden on top of everything else. But once set up, it runs largely on autopilot. The key is understanding your obligations and getting the initial setup right.

What is auto-enrolment?

Auto-enrolment is the UK government's system to ensure more people save for retirement. Every employer must:

1. Set up a qualifying workplace pension scheme
2. Automatically enrol eligible workers
3. Make employer contributions
4. Manage opt-outs and re-enrolment

The system has been fully in force since 2018, meaning it applies to all employers regardless of size.

Who must be enrolled?

Eligible jobholders

You must automatically enrol workers who:

• Are aged between 22 and State Pension age
• Earn more than the earnings trigger (currently £10,000 per year)
• Work in the UK

These workers must be enrolled and both they and you must contribute.

Non-eligible jobholders

Workers who meet some but not all of the eligible criteria — for example, aged 16-21 or over State Pension age, or earning between the lower earnings threshold and the earnings trigger — have the right to opt in if they ask. If they do, you must make employer contributions.

Entitled workers

Workers earning below the lower earnings threshold can ask to join the scheme, but you are not required to make employer contributions for them.

Minimum contribution rates

The minimum total contribution is eight percent of qualifying earnings, split between employer and employee:

| Contribution | Minimum percentage | |-------------|-------------------| | Employer | 3% | | Employee | 5% | | Total | 8% |

Qualifying earnings are earnings between the lower and upper earnings thresholds. These thresholds are reviewed annually.

You can choose to contribute more than the minimum if you wish to offer a more attractive pension benefit.

Calculating contributions

Contributions are calculated on qualifying earnings — the portion of earnings between the lower and upper thresholds. For example, if an employee earns £25,000 per year:

• Lower threshold: £6,240 (example figure — check current year)
• Upper threshold: £50,270 (example figure)
• Qualifying earnings: £25,000 - £6,240 = £18,760
• Employer contribution (3%): £562.80 per year
• Employee contribution (5%): £938.00 per year

Alternatively, you can choose to calculate contributions on total earnings or basic pay, provided the total contributions meet or exceed the minimum percentage of qualifying earnings.

Choosing a pension provider

You need a qualifying workplace pension scheme. Options include:

NEST (National Employment Savings Trust)

NEST is a government-backed scheme specifically designed for auto-enrolment. It must accept any employer who wishes to use it. Advantages include low charges and straightforward setup. It is a popular choice for small businesses.

Other pension providers

Many commercial pension providers offer workplace pension schemes compatible with auto-enrolment. Some offer additional features like wider investment choices, online portals for employees, and integration with payroll software. Compare charges, features, and service levels before choosing.

What to consider

• Charges — Annual management charges affect your employees' pension pots over time
• Investment options — Does the scheme offer a suitable default fund and alternative options?
• Ease of administration — How easy is it to submit contributions and manage enrolments?
• Payroll integration — Does the provider integrate with your payroll software to automate contribution submissions?

Setting up auto-enrolment

Step 1: Choose your pension scheme

Select and register with a pension provider before your duties start.

Step 2: Assess your workforce

Determine which category each worker falls into (eligible, non-eligible, or entitled) based on their age and earnings.

Step 3: Enrol eligible workers

Write to eligible workers informing them they have been enrolled. The letter must include specific information about the scheme, contributions, and their right to opt out.

Step 4: Set up contributions

Configure your payroll to calculate and deduct employee contributions, and add your employer contributions. Contributions must be paid to the pension provider by the due date — typically the 22nd of the month following the deduction (or the 19th if paying by cheque).

Step 5: Complete your declaration of compliance

Within five months of your duties starting, you must complete a declaration of compliance with The Pensions Regulator. This confirms you have met your auto-enrolment obligations.

Ongoing obligations

Monthly contributions

Each pay period, you must calculate, deduct, and pay contributions to your pension provider. Late payments can trigger penalties from The Pensions Regulator.

Managing opt-outs

Workers can choose to opt out within one month of being enrolled. If they do, you must refund any contributions already deducted. You cannot encourage or incentivise workers to opt out.

Re-enrolment

Every three years, you must re-enrol eligible workers who previously opted out. This gives them a fresh opportunity to start saving. You must also complete a re-declaration of compliance each cycle.

New starters

Every new employee must be assessed when they join. Eligible jobholders must be enrolled from their first day of employment (or their first pay period, depending on your postponement approach).

Record-keeping

Keep records of:

• Who has been enrolled and when
• Contributions paid (employer and employee)
• Opt-out notices received
• Communications sent to workers
• Pension scheme details

Retain these records for six years (four years for opt-out records).

The accounting side

Recording pension costs

Employer pension contributions are a business expense. Record them in your accounting software as a payroll cost, separate from salaries and wages so you can track them clearly.

Employee contributions are deducted from gross pay and paid to the pension provider on the employee's behalf. These pass through your accounts as a liability (owed to the pension provider) until paid.

Cash flow impact

Pension contributions increase your payroll costs. For a business with ten employees each earning £25,000, the employer contribution at three percent of qualifying earnings adds approximately £5,600 per year. Factor this into your cash flow planning and budgeting.

Payroll integration

Your payroll software or provider should handle the calculation of pension contributions automatically. Ensure it is configured correctly for your chosen contribution basis (qualifying earnings, total earnings, or basic pay) and rates.

Common mistakes

Missing the deadline

Late enrolment or late contribution payments trigger penalties from The Pensions Regulator. Set up processes and reminders to ensure deadlines are met consistently.

Incorrect worker assessment

Misclassifying a worker's category can mean either failing to enrol someone who should be enrolled or incorrectly enrolling someone. Reassess workers when their age or earnings change.

Encouraging opt-outs

It is illegal to encourage, induce, or coerce workers to opt out of the pension scheme. Even casual comments like "you probably do not need this" can be problematic.

Not re-enrolling

The three-year re-enrolment cycle is easy to forget. Set a reminder well in advance of each re-enrolment date.

Ignoring part-time and casual workers

Auto-enrolment applies to all workers who meet the criteria, regardless of whether they are full-time, part-time, casual, or on zero-hours contracts. Assess every worker.

Getting help

The Pensions Regulator

The Pensions Regulator's website provides comprehensive guidance, tools, and checklists for employers. Their duties checker tool helps you understand your specific obligations.

Your accountant

Your accountant can help with the financial aspects — setting up payroll deductions, recording contributions, and ensuring compliance.

Payroll providers

If you use a payroll bureau or payroll software, they should handle much of the auto-enrolment administration. Confirm what they cover and what remains your responsibility.

Relentify's accounting platform integrates payroll management with your wider business finances, making it easier to track pension contributions alongside other payroll costs and maintain the records you need for compliance.

Just get it done

Auto-enrolment can feel daunting, especially for small businesses doing it for the first time. But the setup is a one-time effort, and the ongoing administration is manageable with the right payroll and accounting systems. The penalties for non-compliance are real and escalating. The sooner you set up properly, the sooner you can stop worrying about it.