How Does Auto-Enrolment Affect Payroll?
During your working career, you should ideally be saving money towards your pension fund. When you eventually retire, you can have peace of mind that you will be financially stable and enjoy your retirement. Due to advances in healthcare, life…
During your working career, you should ideally be saving money towards your pension fund. When you eventually retire, you can have peace of mind that you will be financially stable and enjoy your retirement. Due to advances in healthcare, life expectancies have risen considerably and one may need more than what state pensions can offer.
By having a workplace pension, employees can enjoy the benefits of tax relief and compound interest which can grow a considerable amount of funds by the time retirement comes. For those who have stopped working, they can still maintain their independence and quality of life without financial stress.
Auto-enrolment started in the UK in 2012 to help employees save for their retired years. UK employers are now required to create a workplace pension scheme and automatically enrol those who meet the requirements. Since it was introduced, approximately 10 million people have been enrolled.
Companies that offer payroll software in the UK include:
Auto-enrolment can be applied to both full-time and part-time employees as long as they meet the following requirements:
Work and reside in the United Kingdom under a contract of employment. Aged between 22 and the state pension age. Do not already have a workplace pension in place. Must earn more than £10,000 annually as of the 2025/26 tax year.
As long as employees meet the criteria, they can also be covered if they are on a short-term contract or they are on maternity leave.
Those who are self-employed can’t be auto-enrolled as it is specifically designed for employees working under a contract of employment. However, self-employed individuals should set up their own personal pension fund for financial freedom in retirement.
During your working career, you should ideally be saving money towards your pension fund.
How Much Do Employees Need To Contribute?
In the current tax year, the minimum auto-enrolment contribution if 8% of the employee’s qualifying earnings. This amount is set by the government, and is currently between £6,240 and £50,270. Employers are required to pay 3% while employees need to pay the remaining 5%.
The qualifying earnings are made up of salary, bonuses, overtime, any commissions if applicable, sick pay and parental leave, including maternal, paternal and adoption pay.
Can Employees Opt-Out Of Auto-Enrolment?
Employees do have the choice to opt-out after they have been enrolled. However, employees will then lose access to their employer’s pension contribution and also the government’s in the form of tax relief.
If you have been enrolled and wish to opt-out, you will need to fill out a form provided by your employer and any payments that were made into the pension will be given to you.
Employers are required to re-enrol employees after three years, as long as they still meet the eligibility requirements.
How Does Auto-Enrolment Affect Payroll?
Employers have to adapt their payroll systems in order to comply with pension contributions. Let’s take a further look at how payroll can be affected by the scheme.
Payroll systems need to constantly revise every employee’s eligibility on an on-going basis. This is to factor in their age, employment status and earnings. The assessment will need to apply to each pay period as employee circumstances can change from month to month, such as salary increases or bonuses which will affect their total earning amount.
Whether a company’s payroll system is manual or automated, pension contributions have to be calculated correctly to avoid mistakes. This will be based on the employee’s qualifying earnings from basic salary and sick leave to overtime and commissions. Payroll systems are required to deduct the applicable amounts from both the employee and employer.
If an employee wants to opt-out of auto-enrolment, payroll systems will need to process the request and refund them the contributions that they are entitled to. For this reason, payroll will need to be adaptable to accommodate opt-out requests if and when they happen.
Under UK law, employers are required to re-assess and re-enrol eligible employees after a three year period. Payroll systems will have to manage this process to oversee that employees are actually re-enrolled and contributions take place, unless they wish to opt-out again.
Some companies may offer different pension schemes, especially when it comes to new hires versus long-term employees. It will become the responsibility of payroll systems to make sure that each employee is enrolled into their applicable scheme and adjusted when needed.
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Based on reporting by techround.co.uk.