The new tax year has ushered in the next wave of auto-enrolment, meaning higher pension costs for Britain’s small and medium sized enterprises.
Under rules that took effect on 6 April, the minimum pension contribution requirement for employers has doubled this month from 1 to 2 per cent of an employee’s salary.
The increase is not dramatic. It represents an additional £2.50 each week for an employee that earns £13,000 a year. However, the cost of contributions will quickly add up as businesses grow and take on more staff.
Employer auto-enrolment contributions are set to ramp up further still to 3 per cent in 2019
According to the Federation of Small Businesses, company owners in the retail, construction and childcare sectors will be hit hardest by the change as they’re already beset by high inflation and skills shortages.
And those who fail to comply face anything from a £400 fixed penalty to a varying daily-escalating penalty between £50 and £10,000 – depending on how many people they have on the payroll.
The Government-led auto-enrolment initiative was rolled out in 2012 and aims to bolster retirement savings by forcing employers to register UK workers aged between 22 and the state pension age and earning more than £10,000 into a workplace pension scheme.
Staff must also contribute but they can opt out later if they so choose.
It has been one of the biggest drivers in getting people to save for their retirement in the history of pensions in the UK, with around 8.5 million more people saving into a workplace pension since 2012.
What has changed for SME auto-enrolment?
From April 2018 auto-enrolment rates rose to 5 per cent in total, with a minimum of 2 per cent coming from the employer.
This will rise to 8 per cent from April 2019, with a minimum of 3 per cent coming from the employer.
However, these are the minimum amounts – employers are free to pay in more if they wish.
Companies need to be aware of these mandatory increases that will be phased in over the next few years and factor them into their business plans.
How will the changes affect small businesses?
Seek expert advice
Emma Jones, founder of small business network Enterprise Nation
‘We suggest taking advice from your accountant or a financial adviser when deciding how to deal with rising employer contributions.
‘Also it’s important to make sure you’ve got the best deal from your provider.
‘There are pension funds that charge nothing to employers to run their schemes, while some charge large monthly fees to employers. This is also worth investigating as it could cut the overall cost of running your pension.’
Since auto-enrolment began in 2012, nearly 800,000 employers have set up a pension scheme.
But for many small business owners, it is difficult to see auto-enrolment as anything other than a burden – especially as the additional pension contributions come amid a rocky patch for SMEs.
The revaluation of business rates for the first time in seven years in April last year affected millions of SMEs nationwide and left some seriously out of pocket.
In addition, the FSB calculates that around 4 million entrepreneurs will find themselves £150 worse off because of a delay to the scrapping of Class II National Insurance contributions.
The levy was set to be dropped this tax year, but the move has been shelved temporarily.
The trade body also said the 60 per cent drop in the tax-free dividend allowance – launched to encourage shareholder investment – over the past two years will disincentivise entrepreneurship all over the country.
Five reasons boost employee pensions
There’s a number of reasons why offering a generous workplace pension offers firms an advantage – and there are ways to absorb the cost.
Andy Beswick, managing director of Business Solutions at Aviva, shares his top five reasons for offering good employee pensions.
A workplace pension can attract and retain talent
Andy Beswick of Aviva says offering generous pensions could help SMEs attract talent
Businesses of all sizes are beginning to see the benefit of offering a total package to employees rather than just concentrating on salary.
That package now includes a workplace pension so it can be used as a way of bringing in the best people and keeping hold of them. In a competitive environment, this is vital.
The halo effect
If you look after your employees, they will often be very loyal.
Offering a workplace pension can help employees feel more secure knowing that their employer is helping them prepare for the future.
Almost half of people (45 per cent) we surveyed said they were happy that their employer was contributing towards their financial future.
More than half (57 per cent) said they would contribute more into their workplace pension if their employer offered to pay more.
There is no default retirement age
Back in 2011 the default retirement age was scrapped. It means people can now continue working indefinitely.
By offering a workplace pension, employers are helping their staff prepare for retirement so they hopefully don’t have to work into their 70s and businesses can bring in new employees.
Under pension freedoms that were introduced in 2015, savers can access their pension from age 55.
Consider ways to absorb the larger contributions
Business owners should make sure they are getting the best possible value from their company pension scheme.
It’s worth evaluating the charges that are paid against the services received in return – not all workplace pensions are created equal.
Another important way in which SMEs could absorb some of the cost of the increases is by taking out a package deal that includes a pension and corporate insurances – like critical illness cover for employees – from a single provider.
By taking advantage of product grouping, businesses could enjoy discounts on all products within the package.
It also allows businesses to offer an employee benefit package to attract and retain top talent.
Start preparing for further increases now
The increase in pension contributions in April 2018 is going to be followed by a further increase in April 2019.
By then, contributions will reach a minimum of 8 per cent of earnings – typically a minimum of 3 per cent from the employer and 5 per cent from the employee.
For business owners, it makes sense to consider how they might fund the 2019 increase now, rather than repeating the exercise with new figures in a year’s time.
It’s even worth considering whether to embrace this higher minimum employer level in a single move.
Increasing the employer contribution to the 2019 minimum of 3 per cent of earnings ahead of time could enhance the reputation of a business as an enlightened employer – helping them to recruit and retain the right people.
What do our SME bosses make of the contribution increase?
The additional cost burden of rising auto-enrolment contributions is not an issue for Susanne Johnson, who runs Mrs Johnson’s Emporium of Wool and Haberdashery as well as three other micro business – each has one employee.
Susanne Johnson of Mrs Johnson’s Emporium of Wool and Haberdashery says AE is an administrative headache
She says: ‘It means that I will now have to contribute £4 a week instead of £2 which really isn’t a dramatic increase.
‘I take issue with the bureaucracy of it all – it can be a real headache. Big companies hire people to manage their pension affairs, but we can’t afford to do the same.
‘I have to wear so many different hats when running my businesses and it’s difficult to find the time to do it all.’
Meanwhile, Mark Neild, founder of Reading-based leadership advice firm Agileering, said he uses contractors rather than hiring employees to keep costs down.
He said: ‘Employer’s and employees’ NI, income tax and pension contributions can add 60 per cent to the bill.
‘I would rather my contractors decided for themselves how to use their income to pay themselves and make contributions to tax and pensions in a way that suits them rather than having it imposed in a one-size-fits-all manner from on high.’
Small Business Essentials