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Pension and Automatic Enrolment

The government is placing greater responsibility and sometimes higher costs on employers. Employers are required to provide access to pension provision for their employees. If you are an employer in the Wolverhampton area we, at Everest and Co Accountants, can provide help and advice of your auto-enrolment responsibilities.

evererst- pension
“We can help you to manage the road to automatic enrolment and help you to comply with the requirements when you are in automatic enrolment.”
Payroll Services
Automatic enrolment

Employers are able to comply with their obligations by using an existing qualifying pension scheme, setting up a new scheme or using the government low cost scheme – the National Employment Savings Trust (NEST).

Payroll Services
Pensions - Tax Reliefs

Personal Pensions are common types of ‘registered pension schemes’ which allow members to obtain tax relief on contributions into the scheme and tax free growth of the fund within limits. 

Table of Contents

What is automatic enrolment?

Automatic enrolment places duties on employers to automatically enrol ‘workers’ into a work based pension scheme. The main duties are:

Assessing the types of workers in the business

Whether this is an easy or difficult task depends on the type of business. A business which uses the services of casual workers, very young or very old workers will need to spend some time in analysing its workforce. A business which only employs salaried staff will have an easier task.

A ‘worker’ is:

  • an employee; or
  • a person who has a contract to provide work or services personally and is not undertaking the work as part of their own business.

The second category is defined in the same way as a ‘worker’ in employment law. Such people, although not employees, are entitled to core employment rights such as the National Minimum Wage (NMW). Individuals in this category include some agency workers and some short-term casual workers.

There are three categories of workers: eligible jobholders; non-eligible jobholders; and entitled workers.

An ‘eligible jobholder’ is a worker who is:

Most workers will be eligible jobholders unless the employer already has a qualifying pension scheme. These are the workers for which automatic enrolment will be required.

Other workers (non-eligible jobholders) may have the right to ‘opt in’ (i.e. join a scheme) and should therefore be treated as eligible jobholders. ‘Entitled workers’ are entitled to join the scheme but there is no requirement on the employer to make employer contributions in respect of these workers.

How we can help

The categorisation of workers can be difficult in some circumstances. Please contact us if you are unsure of how to assess the types of workers you have.

In December 2017, following a review of the auto-enrolment system by the Department for Work and Pensions, the government proposed to change the lower age limit from 22 to 18 (while maintaining the upper age limit at the SPA). Under the proposals, those aged between 18 and the SPA would be automatically enrolled into a workplace pension scheme if they earned above £10,000 per year. Workers aged 16 to 18 and employees over the SPA would remain eligible to opt into their workplace pension scheme. The government plans to implement the proposals in the mid-2020s.

What is a qualifying automatic enrolment pension scheme?

Employers are able to comply with their obligations by using an existing qualifying pension scheme, setting up a new scheme or using the government low cost scheme – the National Employment Savings Trust (NEST).

It is important that the pension scheme chosen will deliver good outcomes for the employee’s retirement savings. This may mean that an employer’s existing scheme may not be appropriate as it may have been designed for the needs of higher paid and more senior employees. This may mean that NEST for example may be an appropriate scheme for employees who are not currently entitled to be a member of an existing employer scheme.

To be a qualifying automatic enrolment scheme, a scheme must meet the qualifying criteria and the automatic enrolment criteria.

The main part of the qualifying criteria requires the pension scheme to meet certain minimum standards, which differ according to the type of pension scheme. Most employers will want to offer a defined contribution pension scheme. The minimum requirements for such schemes are a minimum total contribution based on qualifying earnings, of which a specified amount must come from the employer.

To be an automatic enrolment scheme, the scheme must not contain any provisions that:

The second point above means, for example, that the pension scheme has a default fund into which the pension contributions attributable to the jobholder will be invested. The jobholder should however have a choice of other funds if they want.

How we can help

We may be able to advise you on an appropriate route to take. Please contact us.

The law came into force for very large employers in 2012 and has been rolled out with staggered implementation dates or ‘staging date’ by reference to the number of employees.

From October 2017, all new employers will have automatic enrolment duties from the date they employ their first member of staff.

In principle, contributions will be due from the first day of employment but it is possible to postpone automatic enrolment for some or all employees for a period of up to three months. This may, for example, be used to avoid calculation of contributions on part-period earnings.

An employer can find out more about their duties at www.thepensionsregulator.gov.uk.

Communicating with your workers

Employers are required to write to all workers (except those aged under 16, or 75 and over) explaining what automatic enrolment into a workplace pension means for them.

There are different information requirements for each category of worker. For an eligible jobholder, the letter must include details of how the employee can opt out of the scheme if they wish. The letter must not, however, encourage the employee to opt out.

The Pensions Regulator (TPR) has developed a set of letter templates to help you when writing to your employees.

Automatic enrolment of eligible jobholders and payment of contributions

As part of the automatic enrolment process, employers will need to make contributions to the pension scheme for eligible jobholders.

All businesses now need to contribute at least 3% on the ‘qualifying pensionable earnings’ for eligible jobholders. There is also a contribution which needs to be paid by employees if the employer does not meet the total minimum contribution.

Gross pension contribution £62,500
Less annual allowance (£40,000)
Excess £22,500 taxable at 40% = £9,000

What are qualifying pensionable earnings?

Earnings cover cash elements of pay including overtime and bonuses (gross) but minimum contributions are not calculated on all the earnings. Contributions will be payable on earnings between the lower and higher thresholds of £6,240 and £50,270 for 2021/22 (£6,240 and £50,000 for 2020/21). The earnings between these amounts are called qualifying earnings. The thresholds are reviewed by the government each tax year.

If we do your payroll, we can help you make these calculations and tell you the deductions from pay and the payments required to the pension scheme.

Declaration of Compliance

TPR was established to regulate work-based pensions.

An employer must complete the Declaration of Compliance within five months of the staging date (or from taking on their first employee). In essence the Declaration of Compliance process requires the employer to:

Employers’ ongoing duties

Employers continue to have ongoing duties in respect of auto-enrolment.

Re-enrolment

Employers have a legal duty to re-enrol certain employees back into an automatic pension scheme every three years. The process involves reassessing the workforce and re-enrolling certain employees into their chosen qualifying automatic pension scheme. Employers are also required to complete the re-declaration of compliance with TPR, even if they do not have any staff to re-enrol. Re-enrolment should take place approximately three years after the original staging date.

As part of their re-enrolment responsibilities, employers are required to carry out the following tasks:

Choose a re-enrolment date

There is a six month window from which to choose a date for re-enrolment. This can be either three months before or after the third anniversary of the original staging date. There is no option to postpone the re-enrolment date.

Reassess the workforce

The employer will only need to assess employees who were previously auto-enrolled and have subsequently either: asked to leave (opted out) of the pension scheme; left the pension scheme after the end of the opt-out period; or stopped or reduced their pension contributions to below the minimum level (and who meet the age and earnings criteria to be re-enrolled). Once the assessment is complete, employers should re-enrol eligible staff into a qualifying pension and start making contributions within six weeks of their re-enrolment date.

Write to those who have been re-enrolled

The employer will need to write to each employee who has been re-enrolled into the pension scheme. This should be done within six weeks of the re-enrolment date. Template letters are available on TPR website.

Complete the re-declaration of compliance

The employer is required to complete and submit the re-declaration of compliance with TPR to let them know that they have met their legal duties. This should be done within five months of the third anniversary of the staging date. An employer is required to do this even if they have not re-enrolled any staff into the pension scheme.

Remember, re-enrolment and re-declaration is a legal requirement and failure to comply with the regulations may result in a fine.

The penalties for non-compliance

Employers who fail to comply with their legal duties may be subject to enforcement action. TPR has a range of powers it can utilise when taking action for non-compliance. This can range from warning letters and statutory notices to financial penalties. Fines range from a £400 fixed penalty, to a varying daily escalating penalty of between £50 and £10,000, depending on the number of employees. In the most extreme cases the Regulator may seek a criminal prosecution.

Keeping records

Finally, an employer must keep records which will enable them to prove that they have complied with their duties. Keeping accurate records also makes good business sense because it can help an employer to:

Duties checker TPR guidance

TPR guidance is available for employers to help them comply with their automatic enrolment duties: www.thepensionsregulator.gov.uk/en/employers.

Using the duties checker and the guidance, employers can follow a step-by-step process to comply with their duties. The guidance also includes links to tools and resources.

Changes ahead

Following a review of the auto-enrolment system by the Department for Work and Pensions, the government proposed to change the lower age limit from 22 to 18 (while maintaining the upper age limit at the SPA). Under the proposals, those aged between 18 and the SPA would be automatically enrolled into a workplace pension scheme if they earned above £10,000 per year. Workers aged 16 to 18 and employees over the SPA would remain eligible to opt into their workplace pension scheme.

The government is also proposing to remove the lower threshold for qualifying pensionable earnings. Under the plans, employers and employees contributing to pensions via automatic enrolment would make contributions from £1 of earnings rather than from the lower threshold.

The government plans to implement the proposals in the mid-2020s.

How we can help

As you can see pensions automatic enrolment is not a straightforward business. If your business is in the Wolverhampton area please do contact us at Everest and Co Accountants for help and advice. We can help you to manage the road to automatic enrolment and help you to comply with the requirements when you are in automatic enrolment.

Pensions - Tax Reliefs

Personal Pensions are common types of ‘registered pension schemes’ which allow members to obtain tax relief on contributions into the scheme and tax free growth of the fund within limits. We consider the rules here. At Everest and Co. , we provide advice on all taxes in the Wolverhampton area and can help you to consider maximising tax relief on pension provision.

Types of pension schemes

There are two broad types of pension schemes from which an individual may eventually be in receipt of a pension:

A Workplace pension scheme may either be a defined benefit scheme or a money purchase scheme.

A defined benefit scheme pays a retirement income related to the amount of your earnings, while a money purchase scheme instead reflects the amount invested and the underlying investment fund performance.

The number of defined benefit pension schemes has declined in recent years in part due to the regulations imposed upon the schemes and the cost of such schemes to the employer.

All employers will soon need to provide a workplace pension scheme due to auto-enrolment legislation and these are likely to be money purchase schemes.

A Personal Pension scheme is a privately funded pension plan but can also be funded by an employer. These are also money purchase schemes. Self-employed individuals can have a Personal Pension.

We set out below the tax reliefs available to members of a money purchase Workplace scheme or a Personal Pension scheme.

It is important that professional advice is sought on pension issues relevant to your personal circumstances.

What are the tax breaks and controls on the tax breaks?

To benefit from tax privileges all pension schemes must be registered with HMRC. For a Personal Pension scheme, registration will be organised by the pension provider.

A money purchase scheme allows the member to obtain tax relief on contributions into the scheme and tax free growth of the fund. If an employer contributes into the scheme on behalf of an employee, there is, generally no tax charge on the member and the employer will obtain a deduction from their taxable profits.

When the ‘new’ pension regime was introduced from 6 April 2006 no limits were set on either the maximum amount which could be invested in a pension scheme in a year or on the total value within pension funds. However two controls were put in place in 2006 to control the amount of tax relief which was available to the member and the tax free growth in the fund.

Firstly, a lifetime limit was established which set the maximum figure for tax-relieved savings in the fund(s) and has to be considered when key events happen such as when a pension is taken for the first time.

Secondly, an annual allowance sets the maximum amount which can be invested with tax relief into a pension fund. The allowance applies to the combined contributions of an employee and employer. Amounts in excess of this allowance trigger a charge.

There are other longer established restrictions on contributions from members of money purchase schemes (see below).

Key features of money purchase pensions

There are two broad types of pension schemes from which an individual may eventually be in receipt of a pension:

PERSONS ELIGIBLE

All UK residents may have a money purchase pension. This includes non-taxpayers such as children and non-earning adults. However, they will only be entitled to tax relief on gross contributions of up to £3,600 per annum.

Relief for individuals' contributions

An individual is entitled to make contributions and receive tax relief on the higher of £3,600 or 100% of earnings in any given tax year. However tax relief will generally be restricted for contributions in excess of the annual allowance.

Methods of giving tax relief

Tax relief on contributions is given at the individual’s marginal rate of tax.

An individual may obtain tax relief on contributions made to a money purchase scheme in one of two ways:

In both cases the basic rate is claimed back from HMRC by the pension provider.

A more effective route for an employee may be to enter a salary sacrifice arrangement with an employer. The employer will make a gross contribution to the pension provider and the employee’s gross salary is reduced. This will give the employer full income tax relief (by reducing PAYE) but also reducing National Insurance Contributions.

There are special rules if contributions are made to a retirement annuity contract. (These are old schemes started before the introduction of personal pensions.)

The annual allowance

The annual allowance is £40,000.

Any contributions in excess of the £40,000 annual allowance are potentially charged to tax on the individual as their top slice of income. Contributions include contributions made by an employer.

The stated purpose of the charging regime is to discourage pension saving in tax registered pensions beyond the annual allowance. Most individuals and employers actively seek to reduce pension saving below the annual allowance, rather than fall within the charging regime.

Individuals who are eligible to take amounts out of their pension funds under the flexibilities introduced from 6 April 2015 but who continue to make contributions into their schemes may trigger other restrictions in the available annual allowance. This is explained later in this factsheet in ‘Money Purchase Annual Allowance’.

Lower annual allowance for those with ‘adjusted income’ over £240,000

Adjusted income means, broadly, a person’s net income and pension contributions made by an employer. For every £2 of adjusted income over an adjusted income threshold, an individual’s annual allowance is reduced by £1, down to a minimum amount.

Previously the reduction potentially applied to an individual with income before tax, without the addition of employer contributions, above £110,000. This is known as the ‘threshold income’.

Prior to 6 April 2020 adjusted income was set at £150,000, threshold income at £110,000 and the minimum annual allowance at £10,000.

Adjusted income and threshold income were each raised by £90,000 for 2020/21. So the threshold income is now £200,000 and individuals with income below this level are not affected by the tapered annual allowance. The annual allowance begins to taper down for individuals who have an adjusted income above £240,000.

The minimum level to which the annual allowance can taper down is now £4,000.

The rate of charge if annual allowance is exceeded

The charge is levied on the excess above the annual allowance at the appropriate rate in respect of the total pension savings. There is no blanket exemption from this charge in the year that benefits are taken. There are, however, exemptions from the charge in the case of serious ill health as well as death.

The appropriate rate will broadly be the top rate of income tax that you pay on your income.

EXAMPLE

Anthony, who is employed, has taxable income of £120,000 in 2021/22. He makes personal pension contributions of £50,000 net in March 2022. He has made similar contributions in the previous three tax years.

He will be entitled to a maximum £40,000 annual allowance for 2021/22. The charge will be:

 

Gross pension contribution £62,500
Less annual allowance (£40,000)
Excess £22,500 taxable at 40% = £9,000

Anthony will have had tax relief on his pension contributions of £25,000 (£62,500 x 40%) and now effectively has £9,000 clawed back. The tax adjustments will be made as part of the self assessment tax return process.

Carry forward of unused annual allowance

To allow for individuals who may have a significant amount of pension savings in a tax year but smaller amounts in other tax years, a carry forward of unused annual allowance is available.

The carry forward rules apply if the individual’s pension savings exceed the annual allowance for the tax year. The annual allowance for the current tax year is used before any unused allowance brought forward. The earliest year unused allowance is then used before a later year.

Unused annual allowance carried forward is the amount by which the annual allowance for that tax year exceeded the total pension savings for that tax year.

This effectively means that the unused annual allowance of up to £40,000 can be carried forward for the next three years.

Importantly no carry forward is available in relation to a tax year preceding the current year unless the individual was a member of a registered pension scheme at some time during that tax year.

EXAMPLE

Assume it is March 2022. Bob is a self employed builder. In the previous three years Bob has made contributions of £30,000, £10,000 and £30,000 to his pension scheme. As he has not used all of the £40,000 annual allowance in earlier years, he has £50,000 unused annual allowance that he can carry forward to 2021/22.

Together with his current year annual allowance of £40,000, this means that Bob can make a contribution of £90,000 in 2021/22 without having to pay any extra tax charge.

The lifetime limit

The lifetime limit sets the maximum figure for tax-relieved savings in the fund at £1,073,100 for 2021/22 and 2020/21. The annual link to the CPI increase is being removed for five years. This will maintain the standard Lifetime Allowance at £1,073,100 for tax years 2021/22 to 2025/26.

If the value of the scheme(s) exceeds the limit when benefits are drawn there is a tax charge of 55% of the excess if taken as a lump sum and 25% if taken as a pension.

Accessing your pension - freedom

Individuals have flexibility to choose how to access their pension funds from the age of 55. The options include:

An annuity is taxable income in the year of receipt. Similarly any monies received from the income drawdown fund are taxable income in the year of receipt.

Flexi access accounts and lump sums

Where a lump sum and annuity are not taken access to the fund can be achieved in one of two ways:

When an allocation of funds into a flexi-access account is made the member typically will take the opportunity of taking a tax free lump sum from the fund.

The person will then decide how much or how little to take from the flexi-access account. Any amounts that are taken will count as taxable income in the year of receipt.

Access to some or all of a pension fund without first allocating to a flexi-access account can be achieved by taking an uncrystallised funds pension lump sum.

The tax effect will be:

Money Purchase Annual Allowance (MPAA)

The government is alive to the possibility of people taking advantage of the flexibilities by ‘recycling’ their earned income into pensions and then immediately taking out amounts from their pension funds. Without further controls being put into place an individual would obtain tax relief on the pension contributions but only be taxed on 75% of the funds immediately withdrawn.

The MPAA sets the maximum amount of tax efficient contributions in certain scenarios. The allowance is currently set at £4,000 per annum.

There is no carry forward of any of the annual allowance to a later year if it is not used in the year.

The main scenarios in which the reduced annual allowance is triggered are if:

How we can help

This information sheet provides general information on pensions and tax reliefs. At Everest and Co Accountants, we provide advice on all taxes in the Wolverhampton area so please contact us for more detailed advice if you are interested in making provision for a pension.

Pensions – Tax Treatment on death

Significant changes have been made to the tax treatment of pension funds on death. At Everest and Co Accountants, we can provide guidance on the rules which allow pension funds to pass free of all taxes in the Wolverhampton area.

Alongside the changes from April 2015 to the access of pension funds, significant changes were made to the tax treatment of pension funds on death. This factsheet summarises the rules which may allow a pension fund to pass free of all taxes on the estate of the deceased and free of all taxes on the beneficiaries of the pension fund.

IHT and pension funds

If an individual has not bought an annuity, a defined contribution pension fund remains available to pass on to selected beneficiaries. Inheritance tax (IHT) can be avoided by making a ‘letter of wishes’ to the pension provider suggesting to whom the funds should be paid. If an individual’s intention has not been expressed the funds may be paid to the individual’s estate resulting in a potential IHT liability.

Other tax charges on pension funds

Prior to 6 April 2015, there were other tax charges on death to reflect the principle that income tax relief would have been given on contributions into the pension fund and therefore some tax should be payable when the fund is paid out. For example:

There were some exceptions from the 55% charge. It was (and still is) possible to pass on a pension fund as a tax free lump sum where the individual has not taken any tax free cash or income from the fund and they die under the age of 75.

he government introduced significant exceptions from the tax charges for benefits first paid on or after 6 April 2015.

Under the revised rules, anyone who dies under the age of 75 is able to give their remaining defined contribution pension fund to anyone completely tax free, whether it is in a drawdown account or untouched.

The fund can be paid out as a lump sum to a beneficiary or taken out by the beneficiary through a ‘flexi-access drawdown account’.

Those aged 75 or over when they die will be able to pass their defined contribution pension fund to any beneficiary who will then be able to draw down on it as income at their marginal rate of income tax. Beneficiaries will also have the option of receiving the pension as a lump sum payment, subject to a tax charge of 45%.

The tax treatment does not apply to the extent that the pension fund exceeds the Lifetime Allowance (£1,073,100 million from 6 April 2020).

Tax treatment of inherited annuities

Beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity are able to receive any future payments from such policies tax free. If the individual dies aged 75 or over beneficiaries can receive payments at their marginal tax rate.

How we can help

These changes may for some turn traditional IHT planning on its head. If you are in the Wolverhampton area please do contact us for guidance on the options available and the effect on your current IHT plans.

Have a question?

Read through our FAQ section below.

Your records must show you’ve reported accurately, and you need to keep them for 3 years from the end of the tax year they relate to. HMRC may check your records to make sure you’re paying the right amount of tax.

There are many payroll software systems on the market for Start Ups, SME’s and large businesses. For our clients we we use Xero; for more information about Xero please visit their website www.xero.com/uk/accounting-software/payroll/

You will need to complete the following forms or maintain the equivalent digital records:

P11 Deductions Working Sheet
This form (or a computer-generated equivalent) must be maintained for each employee. It details their pay and deductions for each week or month of the tax year.

P60 End of Year Summary
This form has to be completed for and given to all employees employed in a tax year.

P45 Details of Employee Leaving
This form needs to be given to any employee who leaves and details the earnings and tax paid so far in the tax year. New employees should let you have the form from their previous employer.

Starter Checklist
When a new employee starts you will need to advise HMRC so that you can pay them under RTI. Some of the necessary information may be obtained from the P45 if the employee has one from a previous job.