1. What Is a Workplace Pension?
A workplace pension scheme is a savings plan arranged by employers to help employees save for retirement. Contributions come from the employer, the employee, and tax relief from the government.
2. Legal Requirements for Small Companies
Under auto-enrolment laws in the UK:
- All employers must provide a workplace pension if they have eligible staff.
- Employees aged 22 to State Pension Age, earning over £10,000 a year, must be enrolled automatically.
- Employers must contribute a minimum of 3% of qualifying earnings.
- Employees contribute 5%, making the total minimum contribution 8%.
3. Steps to Setting Up Pension Scheme for Small Company
Step 1: Choose a Pension Provider
Popular options include:
- NEST (National Employment Savings Trust)
- The People’s Pension
- NOW: Pensions
- Aviva, Legal & General, Standard Life (private providers)
Step 2: Assess Your Workforce
Identify eligible employees and inform them about their rights.
Step 3: Set Contribution Levels
Decide whether to offer the minimum (3%) or higher contributions as a benefit.
Step 4: Register with The Pensions Regulator
You must declare compliance within 5 months of taking on your first employee.
Step 5: Set Up Payroll Integration
Ensure pension contributions are deducted and paid automatically each pay period.
Step 6: Communicate with Employees
Send letters explaining how auto-enrolment works, contribution levels, and opt-out options.
4. Costs of Setting Up a Pension Scheme
- Setup costs: Many providers (e.g., NEST) have no setup fees.
- Ongoing costs: Employer contributions (minimum 3%) and possible admin charges.
- Payroll software: Some systems charge extra for pension integration.
Example:
If an employee earns £25,000:
- Employer contribution (3%) = £750/year
- Employee contribution (5%) = £1,250/year
- Government tax relief reduces employee’s actual out-of-pocket cost.
5. Benefits of Offering a Pension Scheme
For Employers
- Legal compliance with auto-enrolment rules
- Attracts and retains skilled employees
- Enhances company reputation
- Tax relief on employer contributions
For Employees
- Builds retirement savings automatically
- Employer and government add to contributions
- Tax-efficient way to save for the future
6. Common Mistakes to Avoid
- Missing auto-enrolment deadlines
- Failing to inform employees properly
- Not keeping pension records for at least 6 years
- Choosing a provider without checking fees and investment options
Frequently Asked Questions
1. Do small companies have to provide a pension?
Yes, all UK employers must comply with auto-enrolment rules if they have eligible staff.
2. What is the minimum contribution?
8% of qualifying earnings (3% employer, 5% employee).
3. Can employees opt out?
Yes, but they must be re-enrolled every 3 years unless they opt out again.
4. What if I only have one employee?
You still need to set up a pension scheme if they meet eligibility criteria.
5. How do I choose a pension provider?
Compare fees, investment options, and ease of payroll integration.
6. What happens if I don’t set up a pension scheme?
The Pensions Regulator can fine your business up to £10,000 per day depending on company size.
Conclusion
Setting up pension scheme for small company is a legal requirement in the UK and an important step in supporting employees’ future security. By choosing the right provider, integrating payroll, and communicating clearly, small businesses can stay compliant and strengthen their workplace benefits.