Pension Pot

Automatic Enrolment Pension Changes to Go Ahead – What employers need to know

Two big changes to the Automatic Enrolment pension scheme have been given the go ahead, with financial implications for both employers and their employees. Our payroll team outline the details here.

Auto-Enrolment requires all employers (even those with just one member of staff) to automatically enrol certain staff into a pension scheme and to also make contributions towards it.

What are the Auto-Enrolment Changes?

On 18th September “The Pensions (Extension of Automatic Enrolment) (No. 2) Bill” gained Royal Assent.

This means that two big changes to the Automatic Enrolment system have been given the green light, with financial implications for employers and employees:

1. Minimum Age Reduced: The minimum age to be automatically enrolled into a workplace pension will be reduced from 22 to 18 years of age to encourage younger workers to start saving for their retirement.

2. Lower Earnings Limit Removed: The Lower Earnings Limit (LEL) applied to Qualifying Earnings will be removed, meaning the first pound of employee income is pensionable. Currently, the mandatory 8% contribution to earnings only starts for those earning more than £6,240 per year (the LEL).

When will the changes to auto-enrolment happen?

Not immediately.

We understand that the Lower Earnings Limit will be phased out gradually over time due to the additional financial cost that businesses and employees will have to face. We believe the change may phased in over two to three years starting in 2025.

We will wait to see the final details and keep all of our payroll clients updated.

Why are the government making these changes to auto-enrolment?

Announcing the proposed changes earlier in the year, the Department for Work and Pensions (DWP) said: “Lowering the age at which eligible workers must be automatically enrolled into a pension scheme by their employers from 22 to 18 will make saving the norm for young adults and enable them to begin to save from the start of their working lives.

In addition, the bill provides for the removal of the lower earnings limit, supporting those with low earnings and multiple jobs by ensuring they are saving from the first pound earned.”

What are the financial implications for employers and employees?

These changes to auto-enrolment have been anticipated for some time and will be welcomed by many because they will help low earners and younger workers to save more into their pensions.

However, there will be financial implications for employers and employees.

Employers are likely to face higher pension costs for some employees due to the removal of the lower earnings limit. These costs could affect cashflow and must be accounted for. It is important businesses begin to budget for this change now. If you need help with a cashflow forecast, contact our accounting team today.

Please note that the removal of the Lower Earnings Limit will only affect your business if you currently operate using ‘qualifying earnings’. This is the default method for most businesses and is the most common.

However, some businesses use other pensionable earnings methods such as ‘total earnings’ or ‘basic salary’. If your business uses these other methods, then the changes will not impact you as you are already contributing from the first pound.

It’s also important to note that employees will also have to provide more funds each year if salary exchange is used.

It is important that employers explain the auto-enrolment pension changes to their employees once the details are finalised.

Contact our Payroll Team

If you have any questions about auto-enrolment or the changes that have been announced by the government, then contact our payroll experts on 0161 249 5040 or email: partners@leonherman.co.uk and we will be happy to help you.

How can Leonherman’s payroll team help you?

Above all, we make sure that our clients’ employees are paid on time, correctly, accurately, and in line with legislation.

Our payroll team can also help you by…

  • Applying the right tax codes (but we cannot change them unless told to by HMRC)
  • Ensuring that the correct amount of tax is taken
  • Ensuring that the right amount of National Insurance is taken
  • Managing sickness pay
  • Parental leave (such as maternity and paternity)
  • Managing payroll queries
  • Processing benefits
  • Providing employee payslips
  • Handling and reporting of deductions to HMRC
  • Pension processing and reporting
  • Keeping up to date with the latest legislation, case law and best practice

Call us on 0161 249 5040, or email: partners@leonherman.co.uk to speak to find out more about our payroll services.

Important Disclaimer

This material is published for client information. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by Leonherman.

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