Pension auto-enrolment – how are contractors affected?

If you run a limited company, you may have received a pensions auto-enrolment reminder letter over the past few weeks. We asked a pensions expert which contractors are affected by the new rules.

What is pension auto-enrolment?

Successive Governments have warned that a large percentage of people do not save enough for retirement, creating growing pressure on the Treasury to provide for the needs of an ageing population.

As a result, the Pensions Act 2008 was introduced to obligate employers to offer workplace pension schemes, and to enrol all eligible workers into such schemes (a.k.a. automatic enrolment).

The staging dates for firms to provide such schemes depends on size, starting with the UK’s largest employers in October 2012, until all firms (including the smallest) have joined by 2018.

If you work for an umbrella company, you will automatically be enrolled into its pension scheme when you sign up, although you are able to opt out should you wish to do so.

But, what if you operate via a limited company?

You will receive a letter from the Pensions Regulator asking how you intend to comply with the auto-enrolment rules, or you can look up your staging date on The Pensions Regulator website.

We asked the pensions team at Contractor Financials to explain how you will be affected, according to the way your company operates:

Director (one person company only)

Guidance is very clear that a sole director of a limited company will not be treated as a worker for Auto-Enrolment (AR) purposes if they do not work under a contract of employment for their company and they do not employ any other workers.

The company will still receive a staging date notice, but you can contact the Pension Regulator and apply for an exemption. You must apply for an exemption in this case to remove your obligation. Failure to do so would result in potential fines even if you qualify for this exemption.

Multi Director (e.g. husband and wife)

Directors are treated independently for AR purposes and so the main criteria will be a) do you have a contract of employment with the company and b) is there anyone else working for the firm that has a contract of employment.

Typically the answer is ‘no’ to both and so the rules will not apply. If directors are viewed as workers, then as long as no other employee works for you under a contract of employment then the rules should, again, not apply.

The company will still receive a staging date notice, but you can contact the Pension Regulator and apply for an exemption. You must apply for an exemption in this case to remove your obligation. Failure to do so would result in potential fines even if you qualify for this exemption.

Company secretaries

The position itself is labelled as an ‘office holder’ which typically is not viewed as a worker for auto-enrolment purposes. Also, the company secretary would not typically have a contract of employment with the company.

However, contracts for auto-enrolment purposes is that they can be classed as written, verbal and implied.

The regulator’s view could be that if the company secretary was receiving a salary through the company, which typically office holders don’t, then there is a case for the regulator to view that as a verbal or implied contract and the company secretary could, therefore, be classed as a  potential worker.

However, this still shouldn’t cause a problem for single or multi-director companies as the director typically will not hold a contract of employment. However, if you do employ 1 or more members of staff over and above, then it would be advisable to have a qualifying auto-enrolment pension scheme in place.

Again, if you feel you are exempt you must apply for the exemption from the regulator.

Different classes of workers

The salary level threshold for auto-enrolment is £10,000 per annum (pro-rata), for people aged between 22 and State Pension age – these workers are classed as ‘Eligible Jobholders’.

If you earn between £5,772 and £10,000, you are a ‘Non-Eligible Jobholder’ and you do not have to be auto-enrolled, but a scheme has to be in place as the option to join must be made available.

If earnings are below £5,772 (also known as the Lower Earnings Limit) then you are classed as an ‘Entitled Worker’ and again do not have to be auto-enrolled but with this category, there is also no obligation on the employer to offer access to an AR scheme.

With the above in mind adjusting salary levels may add an additional layer of security if very small companies are worried about AR duties.

Further Information

• The Pensions Regulator
• The Pensions Advisory Service