The changes affect every business that has employees, and business owners will need to know when the rules will apply, and what preparation is required.

The new rules will be phased in over several years. Only larger employers will be affected by the changes in 2012, with the majority of smaller owner managed businesses not being brought into the new rules until 2014, and when in 2014 your business will be affected will depend upon your PAYE reference number.

The effect of the changes

From the agreed date of the change, all eligible employees will be automatically enrolled in a pension scheme. You will be responsible for enrolling these employees into a qualifying pension scheme, meaning that it must meet certain government standards. This is the first time that employers have been required by law to contribute to their employees’ pension. Eligible employees are all those aged at least 22 and under state pension age, earning more than the minimum earnings threshold.

Employees aged between 16 and 22, or over State Pension Age and under 75, and earning more than the earnings threshold, can choose to join the pension scheme and you, as an employer, can choose to contribute. Employees can choose to leave the scheme, however, they will still be able to re-join the scheme should they choose. Employers will also have a duty to re-enrol their eligible employees every three years.

New pension scheme options

If your business has an existing pension scheme in place, then it is likely that this can be used, and you should consult your pension scheme administrator to confirm that this will be the case, or if the terms of the scheme can be amended to qualify. If you do not have an existing pension scheme in place then you have two choices:

1.) Approach a pension provider to set up a qualifying scheme.

2.) Use NEST – a Government approved scheme.

Regardless of the scheme chosen, the company must give employees certain information such as: that they are going to be enrolled into a pension scheme; what that pension scheme is and the amount of contributions they will have to pay.

The amounts to be paid into the scheme

The amount that you will have to pay into the scheme will be gradually increased throughout the staging period and up to October 2017:

From October 2012 (or the date the rules apply to your business if later, to September 2016 the total contributions from the employer and employee will be 2 per cent, with the employer paying a minimum of 1 per cent.

From October 2016 to September 2017 the total contributions from the employer and employee will be 5 per cent, with the employer paying a minimum of 2 per cent.

From October 2017 total contributions from the employer and employee will be 8 per cent, with the employer paying a minimum of 3 per cent.

By 2017 approximately 1 per cent of the employee’s contributions will be from tax relief.

The minimum contribution level is just that, a minimum, and employers will be able to contribute more than the minimum if they wish and many already do.