If you employ at least one person, setting up a workplace pension scheme isn’t just a good idea – it’s a legal requirement. Since the introduction of auto-enrolment, businesses must ensure eligible employees are enrolled in a pension scheme and that the correct contributions are made. While this might sound like extra red tape, it’s a crucial part of supporting your employees’ financial wellbeing and staying compliant with the law.
In this guide, our payroll team breaks down what an auto-enrolment pension is, how employer contributions work, and the key rules you need to follow when setting up a pension scheme for your business. Pensions can be complicated. To help you out, we have included a pensions glossary.
Table of Contents
What is an auto-enrolment pension?
Auto-enrolment is designed to ensure more people save for retirement. As an employer, you’re legally required to enrol eligible employees into a workplace pension scheme and make contributions on their behalf. Employees can opt out if they wish, but you must automatically re-enrol them every three years if they’re still eligible.
To qualify for auto-enrolment, employees must be at least 22 years old but below State Pension age and earn more than £10,000 per year. Those who don’t meet these criteria can still ask to join the scheme, and you may be required to contribute depending on their earnings.
Failing to meet these obligations can lead to fines from the Pensions Regulator, so it’s essential to get things right from the start.
Choosing the right pension scheme
With so many pension schemes available, choosing the right one for your business requires careful consideration. The most important thing is to ensure the scheme meets auto-enrolment requirements and aligns with the needs of your employees.
Different schemes come with varying levels of administrative support, investment options, and fee structures. Some are designed to be simple and cost-effective, while others offer greater flexibility in terms of employee contributions and retirement benefits. It’s worth considering how much involvement you want in managing the scheme – some require more ongoing administration than others.
You’ll also need to think about payroll integration. A scheme that works seamlessly with your payroll system will make pension administration far easier, ensuring contributions are deducted accurately and reducing the risk of compliance issues.
Employer pension contributions: what you need to know
Once your pension scheme is in place, you and your employees will both contribute to it. The minimum employer contribution is currently 3% of an employee’s qualifying earnings, while employees must contribute at least 5%, bringing the total contribution to 8%. These contributions are deducted through payroll, so ensuring seamless payroll integration is crucial.
There are also tax benefits to consider. Employer contributions are usually tax-deductible, reducing your overall tax bill, while employees benefit from tax relief on their contributions. Understanding these financial advantages can help businesses see pension schemes as more than just a compliance requirement, they’re also a valuable incentive for attracting and retaining employees.
Workplace pension rules and compliance
Beyond setting up a scheme and making contributions, there are several ongoing responsibilities you need to be aware of. These include:
- Keeping accurate records of pension contributions, enrolment decisions, and communications with employees
- Re-enrolling employees every three years if they’ve opted out but remain eligible
- Informing The Pensions Regulator that you’ve set up a scheme and are meeting your obligations
Non-compliance can lead to penalties, so it’s important to stay on top of these requirements.
Steps to set up a pension scheme
Setting up a pension scheme involves several key steps:
- Assess your workforce – Identify which employees need to be enrolled
- Choose a pension scheme – Ensure it meets auto-enrolment requirements and suits your business needs
- Communicate with employees – You must inform staff about their pension rights and contributions
- Integrate with payroll – Contributions should be deducted automatically through payroll
- Declare compliance – Inform the Pensions Regulator that your scheme is in place
While this might seem like a lot to manage, working with payroll and pension experts can simplify the process.
How Gravita can help
Setting up and managing a pension scheme goes hand in hand with payroll. Integrating contributions, ensuring compliance, and keeping records up to date can quickly become an administrative burden – especially for growing businesses.
At Gravita, we help businesses manage payroll efficiently, ensuring pension contributions are calculated and processed correctly. Our payroll services ensure compliance with auto-enrolment rules while saving you time and reducing the risk of errors.
If you need support with pension administration, speak to our payroll team to find out how we can help.
Final thoughts
A well-managed pension scheme isn’t just a legal requirement—it’s an important benefit for your employees and a sign that you take their financial future seriously. By understanding the rules, making the right contributions, and integrating pensions with payroll, you can ensure compliance and make the process as smooth as possible.
If you’re looking for expert support to streamline payroll and pension contributions, get in touch with Gravita today.
Glossary of Pension Terms
Auto-Enrolment
A legal requirement for employers to automatically enrol eligible employees into a workplace pension scheme. Employees can opt out, but employers must re-enrol them every three years if they remain eligible.
Declaration of Compliance
A report that employers must submit to The Pensions Regulator to confirm they have met their legal duties regarding auto-enrolment.
Defined Contribution Scheme
A type of workplace pension where both the employer and employee contribute a percentage of earnings. The final pension amount depends on contributions made and investment performance.
Eligible Jobholder
An employee who must be automatically enrolled into a workplace pension scheme. They must be aged between 22 and State Pension age and earn at least £10,000 per year.
Employer Contributions
The percentage of an employee’s qualifying earnings that an employer must contribute to their workplace pension. The minimum required contribution is currently 3%.
Lower Earnings Limit (LEL)
The minimum earnings threshold (£6,240 for the 2024-25 tax year) at which pension contributions are calculated for auto-enrolment.
Opting Out
The process by which an employee chooses to leave the workplace pension scheme after being automatically enrolled. Employees must be re-enrolled every three years if they are still eligible.
Payroll Integration
The process of linking payroll systems with a pension scheme to ensure that contributions are deducted correctly and compliance requirements are met.
Qualifying Earnings
The portion of an employee’s income on which pension contributions are calculated. This includes salary, wages, bonuses, overtime, and commission, typically between £6,240 and £50,270 per year (for the 2024-25 tax year).
Re-Enrolment
The process of re-enrolling employees who have previously opted out of a workplace pension scheme every three years, if they are still eligible.
State Pension Age
The age at which individuals become eligible to receive the UK State Pension. This varies depending on date of birth and government policy.
Tax Relief on Pension Contributions
A financial benefit where pension contributions are deducted before tax is applied to an employee’s earnings, reducing their overall tax liability.
The Pensions Regulator (TPR)
The UK body responsible for regulating workplace pensions, ensuring that employers comply with auto-enrolment and other pension obligations.
Workplace Pension
A pension scheme set up by an employer to provide retirement savings for employees. These schemes must comply with auto-enrolment legislation.
