Be prepared for pension reform

CF writes: I run and own a small engineering business which currently has four employees. I recently learnt that I will have to start making compulsory contributions to the pension schemes of my employees. When will I need to start doing this and what is the cost likely to be?

The good news is that the proposed new work-based pensions are only being introduced from October 2012, writes Chris Lane, a partner at Kingston Smith LLP. Furthermore, it is going to be a phased introduction across all companies depending on the number of people in your PAYE scheme. Larger employers will be the first affected, with smaller employers following on from 2014. If you enter your PAYE reference and number of employees on the website www.tpr.gov.uk/staging, it will predict when your start date will be. The plan is that employers will receive a letter advising them of their start date 6-12 months beforehand.

The current rules are that employers will have to enroll their ‘eligible jobholders’ into the scheme automatically. Employees are entitled to opt out if they wish. As a general rule, any employee who earns the minimum wage should be enrolled into the pension scheme. These rules only apply to employees in the UK.

The financial cost to the company will be the minimum employer’s contribution of 3%, with the employee contributing 5% to achieve the minimum combined contribution of 8%. When calculating the contributions, any pay over the upper earnings threshold of £38,185 can be ignored, as can earnings below the lower earnings limit of £5,715. The additional cost to the employer for someone earning more than the upper earnings limit will therefore be 3% (£38,185 – £5,715)= £974 per annum.

Tax relief of 20% will be available to employees on their gross contributions of 5%, reducing the cost to 4%.