Small business guide to workplace pensions

Providing a workplace pension is a legal requirement for every UK employer. Beyond being an obligation, offering a solid nest egg can unlock key advantages for businesses, from tax benefits to hiring top talent.

Getting it sorted might seem daunting, though, especially for first-time employers, which is why seeking proper guidance and relying on the best HR software is a non-negotiable.

This beginner-friendly guide simplifies everything you need to know about business pensions. We explain your minimum contributions, which types of schemes are available, and even walk you through how to set up a business pension scheme, to help you nail compliance and secure your business’s competitive edge.

What is a workplace pension and why does it matter?

A workplace pension is a retirement savings scheme arranged by employers to help employees put money aside for their future. Pension contributions are taken directly from employee wages, but the employer and government can also contribute by opting in to add “free money” to the employee’s retirement pot.

In the UK, it’s mandatory for employers to offer workplace pensions for eligible employees through a process called automatic enrolment. The legal requirement was phased in from 2012, with even the smallest firms joining in 2017. While employers can opt out, the system was designed to make saving for retirement the default choice, while reducing long-term reliance on State Pensions.

Aside from legal compliance, workplace pensions offer a wealth of benefits. They provide a huge helping hand to employees by offering a simple, tax-efficient way to save for their retirement funds. For businesses, pension schemes can also be a vital tool for staff retention and attraction, as employees are much more likely to stay with a company that demonstrates a commitment to their financial future.

What are my pension obligations as an employer?

As a UK employer, your main obligation is to comply with the rules of automatic enrolment. This is a legal duty designed to help people save for their future. To comply with the rules, you will be required to:

• Choose a pension scheme that’s suitable for auto-enrolment.
• Identify who is eligible for auto-enrolment in your workforce.
• Enrol eligible employees into the scheme.
• Work out how much you need to contribute to the pension.
• Set up the payments.
• Notify your staff about how automatic enrolment applies to them.

Specifically, employers are required to enrol any worker who:

• Is aged between 22 and the State Pension age
• Earns over £10,000 a year
• Works or usually works in the UK
• Is not already a member of a qualifying workplace pension scheme

It’s important to note that while these are the criteria for mandatory automatic enrolment, workers who do not meet these requirements still have the right to join a pension scheme if they choose to.

The system of “staging dates” — a phased roll-out of the automatic enrolment scheme where employers had to meet specific deadlines — officially ended in 2018. Now, employers are required to set up a scheme for their staff on the first day of employment. This ensures that from day one, all eligible employees have the opportunity to begin utilising a workplace pension to save for their retirement.

What are the contribution requirements?

Currently, the legal minimum contribution for a workplace pension is 8% of an employee’s “qualifying earnings”. However, this doesn’t need to be covered by the company alone; it’s a combined contribution from the employer, employee, and a tax relief from the government.

To break this down further:

The employer must contribute a minimum of 3%
The employee must contribute a minimum of 5% (1% of this comes from the government in the form of tax relief)

Employers can opt in to contribute more than 3%, however. If they do this, the employee’s required contribution can be lower, as long as the total contribution meets the threshold.

What are the types of small business pensions?

Typically, businesses can choose between two pension plans: the Defined Contribution (DC) scheme and the Defined Benefit (DB) scheme. However, the DC scheme is used for almost all new workplace pensions.

With the Defined Contribution scheme, also known as the “money purchase scheme”, the total value of the pension pot depends on how much is contributed by the employee and employer, how well the investments perform, and what fees are charged by the provider.

Within this category of pensions, two types are particularly common:

Master Trusts: These large pension schemes are bundled, outsourced solutions that provide plans for multiple, unconnected employers. They are popular among employers as they offer a straightforward and cost-effective way to comply with auto-enrolment, without having to manage the details of the scheme themselves. A popular example of a Master Trust pension scheme is NEST (National Employment Savings Trust), a government-backed, not-for-profit scheme.
Group Personal Pensions (GPPs): This type of workplace pension is where an employer facilitates a collection of pension plans for their employees. With each employee having their own distinctive pension contract with pension providers, this option provides greater flexibility. However, it’s more complex for employers to manage.

The second type of pension plan, the Defined Benefit scheme, guarantees employees a specific income in retirement. The amount eligible workers receive is calculated based on their salary and how long they worked for their employer. Unlike the DC scheme, the responsibility for filling up the pension pot falls on employers, not employees. As a result of this financial risk, DB schemes are now extremely rare in the private sector.

When it comes to picking the right pension scheme for your small business, we’d recommend zeroing in on a number of core factors. Specifically, we recommend opting for a scheme that offers ongoing administrative support and that is easy to set up and integrate with your existing payroll software. You should be mindful of extra costs, including setup fees, monthly charges, and annual fees, as well as the total value offering, to ensure you’re getting the best deal possible.

How to set up and manage a pension scheme?

If you need to set up or switch to a new small business pension scheme, rest assured, the process is designed to be straightforward. Here’s a simple step-by-step guide to follow to help you get the ball rolling today.

Step 1: Pick a pension provider

Before you begin registering, you need to decide which pension scheme is suitable for auto-enrolment. For most small businesses, this decision comes down to two main choices:

• NEST: Since NEST is a government-backed option, it’s specifically designed for auto-enrolment. It doesn’t incur any setup fees, and it is easy to enrol, making it the simplest and most cost-effective choice for small businesses.
• Private providers: You also have the choice between a range of private pension providers. This option will be a good fit if you’re interested in additional services or flexible investment options. However, it takes more work to manage and typically costs more than alternatives.

Step 2: Assess and enrol your staff

Next, you’ll need to categorise your workers to assess who is eligible for auto-enrolment.

All employees over the age of 22 who earn over £10,000 per year will be eligible. But as a general rule of thumb, if you employ someone with an employment contract, you’ll need to set up auto-enrolment to a workplace pension.

After you’ve assessed who is eligible, you must automatically enrol them into your chosen pension scheme. To remain compliant, you’ll need to do this even if they requested to opt out beforehand, as they’re only able to do this after they’ve been enrolled.

Step 3: Register with The Pensions Regulator

Once your pension scheme is up and running, you’re legally obliged to register with The Pensions Regulator (TPR). You’ll need to submit your declaration within five calendar months of your “duties start date”, and this can be done by completing a “Declaration of Compliance” form on The Pensions Regulator’s website.

Before you begin filling out your form, make sure you have all essential information at hand, including your company’s PAYE reference, the name of your pension scheme, the number of employees you have enrolled, and the unique letter code provided by TPR.

Step 4: Set contribution levels

To meet the legal minimum of 8% of an employee’s “qualifying earnings”, employers are responsible for making sure they contribute at least 3% of this total. You can, of course, choose to contribute more than this if you want to. Doing so can offer a range of benefits to businesses, so it is definitely an option worth considering.

Step 5: Communicate with employees

Aside from enrolling your staff in pension schemes, you have a responsibility to inform them about automatic enrolment and how it affects them. As part of this legal duty, you’ll need to send out a letter or email to all eligible employees outlining the scheme, as well as their statutory right to opt out.

This must be provided to workers within six weeks of your duties start date, and must follow specific legal requirements to ensure compliance. To avoid working from a blank page and to ensure your document contains all the relevant information, you can use letter templates provided by TPR.

Step 6: Manage ongoing admin

If you’ve made it this far, congratulations, you’ve successfully secured a foundation for your employees’ financial futures. However, the work isn’t over after you’ve set up the pensions.

There are a number of ongoing duties you’ll have to handle to stay on top of your obligations, including:

• Processing employee opt-out requests
• Automatically enrolling new, eligible employees
• Ensuring the pension scheme is updated when an employee leaves the company
• Re-enrolling any staff who previously opted out of the scheme every three years

The good news? You don’t have to do all of this manually. Lots of the best HR and payroll software systems can streamline these tasks, helping to significantly reduce your administrative burden, while minimising the risk of compliance errors.

What are the benefits of offering a good small business pension?

A generous workplace pension isn’t just a win for employees; it can also deliver a variety of benefits to businesses. Here are some motivations for going above and beyond the legal minimum contribution:

• Tax savings: Since employer contributions to a pension scheme are considered a business expense, they can be deducted from your taxable profits. This reduces your overall corporation tax liability, making pension contributions a highly tax-efficient way to provide compensation.
• National insurance savings: Making pension contributions instead of offering a salary increase also saves your business money in National Insurance Contributions (NICs). These funds can be funnelled back into the business or used to make the pension scheme even stronger.
• Employee financial security: A generous pension scheme helps employees feel more secure about their future. When workers are less concerned about their long-term finances, they are likely to be less stressed and more motivated as a result.
• Staff retention: A robust pension scheme is a highly valued staff benefit. So, by offering a competitive pension, it’ll be easier for you to recruit top talent and retain your best employees.

What happens if you don’t comply?

If you’re feeling hesitant about your obligations regarding business pensions, you should know that complying with the law isn’t optional. Under the Pensions Act 2008, every employer in the UK is legally required to automatically enrol staff into pension schemes.

Failing to comply with your duties can result in legal action, from initial warnings to financial penalties for consistent or deliberate non-compliance. The financial penalties can be severe too, including a fixed penalty of £400 for failing to meet deadlines, followed by escalating daily fines of up to £10,000 depending on the size of your workforce.

You’ll also be required to make backdated contributions for all missed payments, putting you in the exact same financial position you’d be in if you had complied on time.

TPR takes their enforcement duties seriously. For example, in 2024, the public body issued fines of £350,000 and £85,000 for two separate auto-enrolment breaches after employers failed to respond to a series of notices and warnings.

By choosing an appropriate pension scheme and relying on the right tools, compliance doesn’t need to be an uphill battle. With the best HR software, you can automate the bulk of pension tasks, from assessing employee eligibility to making payments to the pension provider.