How workplace pensions and auto-enrolment work
A plain-English guide to how workplace pensions and auto-enrolment work in the UK: who must be enrolled, minimum contributions, tax relief and duties.
A workplace pension is one of the biggest ongoing responsibilities an employer takes on, and the rules around auto-enrolment catch out a lot of businesses. This guide explains how it all works in plain English, so you know who must be enrolled, how much goes in, and what your duties are as an employer.
What a workplace pension is
A workplace pension is a way for employees to save for retirement straight out of their pay. Money goes in from three places: the employee, the employer, and the government in the form of tax relief. Those contributions are invested by a pension provider and build up a pot that the employee can draw on later in life.
The key thing that makes a workplace pension different from a personal one is that the employer sets it up and pays into it. Since 2012, the law has required almost every UK employer to offer one and to enrol most of their staff automatically.
How auto-enrolment works
Auto-enrolment means eligible staff are put into a pension scheme automatically, rather than having to opt in themselves. The idea is to make saving for retirement the default. As an employer you must:
- Assess every member of staff to see who is eligible
- Put eligible staff into a qualifying pension scheme
- Pay at least the minimum employer contribution
- Write to staff explaining what has happened and their rights
- Keep the process running for every new starter and at each pay run
This is a continuous duty, not a one-off task. Every time you run payroll you need to check whether anyone has become eligible, for example because their age or earnings have changed.
Who must be enrolled
Whether someone must be automatically enrolled depends on their age and their earnings. The figures are set by government and reviewed each year, so always check the current thresholds, but the categories work like this.
| Worker group | Age | Earnings | What you must do |
|---|---|---|---|
| Eligible jobholder | 22 to State Pension age | Above the earnings trigger | Enrol automatically |
| Non-eligible jobholder | 16 to 21, or State Pension age to 74 | Above the lower threshold | Enrol if they ask to join |
| Entitled worker | 16 to 74 | Below the lower threshold | Let them join, but no employer contribution required |
In short, if a worker is aged between 22 and State Pension age, earns above the earnings trigger, and works in the UK, you must enrol them automatically. Younger or lower-earning staff still have rights to join if they want to.
Employer and employee contributions
There is a legal minimum total that must go into an auto-enrolment pension. That minimum is 8% of the employee’s qualifying earnings, and it is split between the employer and the employee.
| Who pays | Minimum contribution |
|---|---|
| Employer | At least 3% |
| Employee (including tax relief) | The remainder, usually 5% |
| Total minimum | 8% |
The employer must pay at least 3%. If the employer pays only the minimum, the employee makes up the difference so the total reaches 8%. Many employers choose to pay more than 3%, which reduces the amount the employee has to contribute. Contributions are worked out on qualifying earnings, which is a band of earnings between a lower and an upper limit set each year, rather than on the whole salary.
Tax relief
One of the biggest advantages of a workplace pension is tax relief. Because the government wants to encourage saving, part of the employee’s contribution effectively comes from tax they would otherwise have paid. In practice this means the employee’s 5% share is not all funded from their own take-home pay; some of it is the tax relief.
How the relief is applied depends on the scheme. Under net pay arrangements the contribution comes out of gross pay before tax is calculated. Under relief at source the provider claims basic-rate relief and adds it to the pot. The right method depends on your scheme, and it affects lower earners differently, so it is worth understanding which one your provider uses.
Opting out
Auto-enrolment is automatic, but it is not compulsory for the employee. Once enrolled, a member of staff can choose to opt out. If they opt out within the one-month opt-out window, any contributions already taken are refunded and it is as though they were never enrolled. After that window they can still stop contributing, but earlier contributions usually stay in the pension.
Importantly, an employer must never encourage, induce or pressure anyone to opt out. Doing so is against the law. Your role is simply to give staff the information they need and process their decision.
The employer’s ongoing duties
Auto-enrolment does not stop once staff are enrolled. Your ongoing duties include:
- Assessing staff every pay period and enrolling anyone who becomes eligible
- Deducting and paying contributions to the provider on time, every pay run
- Processing opt-outs and refunds correctly and within the window
- Keeping records of assessments, contributions and communications
- Re-enrolling eligible staff who previously opted out, roughly every three years
- Completing a declaration of compliance, and a re-declaration at re-enrolment, for The Pensions Regulator
Missing any of these can lead to penalties from The Pensions Regulator, so the process needs to run accurately alongside every payroll cycle.
Let us take auto-enrolment off your plate
Auto-enrolment is one of the most fiddly parts of running payroll, because it has to be checked at every pay run and the penalties for getting it wrong are real. We assess your staff, enrol the right people, calculate and submit contributions, handle opt-outs and manage your declarations for you. Learn more about our auto-enrolment and pensions service, or get a quote.