Auto enrolment threshold: What it means in 2015
It has been a busy year for pensions. We saw George Osborne overhaul the pensions system in the March Budget, and we’ve seen the biggest number of businesses stage for auto enrolment (AE) so far since its inception in 2012, says David White of Creative Auto Enrolment.
The latest development is a change when it comes to the earnings threshold for AE into a workplace pension. So for accountants, whose opinions will be increasingly sought-after as thousands of businesses prepare to stage in 2015, what is this change and what does it mean?
In October the government launched a consultation into whether the threshold for AE should be changed for April 2015 to March 2016. This meant a potential change in the eligibility criteria for being automatically enrolled into a workplace pension – specifically the part based on earnings. This currently stands at annual earnings of £10,000. The government has announced that it will be freezing the threshold at £10,000 for the year ahead.
The consultation set out to make sure enough of the right people were saving for retirement. If the threshold is too high, people who should be saving lose out; if it’s too low, people who can’t afford to save will be driven to opt out. At the same time, any change to the legislation has to strike the fine balance of ensuring the right people are saving, while not adding even more complexity for employers – the people actually responsible for implementing auto enrolment.
Indeed the Institute of Directors (IoD) suggested a more radical approach - scrapping the thresholds completely. They said: “Our members regard the rules set around band earnings as way too complicated to understand. We would argue not to alter the levels but to abolish them so if I earn a £100 this week then 3 per cent goes into my pension – it should be automatic and needs radical simplification.” However this was rejected, with the government estimating that this would add around £250m to employers’ costs next year. Instead they say that the decision to freeze the threshold “strikes the right balance between ensuring that the people brought into pensions saving are likely to benefit and administrative simplicity”.
What it means for businesses
This decision means that there is no change in the earnings threshold for employers to worry about. But in fact it is not quite as straightforward as it first appears. A freeze means that the AE threshold will no longer be linked to the income tax threshold. Maintaining this link would have been the simplest solution, and the CBI has also warned of the potential implications of separating the two criteria, both for businesses that have already staged and for those who are preparing to do so.
The current threshold is easy to understand – both for employees who are being enrolled and the employers who are working out eligibility. Broadly, the rule applies that “if you pay income tax you will be auto enrolled” – and linking the AE and income tax thresholds is also compatible with payroll systems. Freezing the trigger will mean that from April, many employees that would not have been eligible for AE if the current rules remained will now be automatically enrolled.
For employers this will require a tweak to its payroll systems. If a firm’s payroll software has a qualifying earnings option, employers will need to check that it has been updated to £10,000 and that it is not going to increase in line with the lower earnings limit from April. Come April, employers will need to double check again that the qualifying earnings is correct. If qualifying earnings is not used, employers will need to select the manual options and check that these are all correct. It’s clear that there is a risk of non-compliance if businesses have too little time or knowledge to implement these changes.
And for accountants?
We know from our experience of this year that many employers are struggling with the legislation – it’s complex and time consuming. The eligibility categories are already confusing and a change in the legislation, albeit a relatively small one in the grand scheme of things, is bound to cause confusion amongst employers who are unsure how this affects them and what they need to do in order to remain compliant.
We have seen many SMEs miss their staging dates throughout 2014, as well as an increase in notices for AE non-compliance and financial penalties. Accountants will have a key role to play in making sure their clients avoid being on the receiving end of these.
Accountants must ensure all businesses are aware that some employees who won’t pay income tax may still pay AE contributions. This might mean updating forecasts if budgets were based on lower earners not being included in AE. For clients that handle their own payroll in-house, accountants will be able to offer valuable advice to make sure they understand the change and can implement it correctly.
Three in four small businesses will turn to advisers for help with the AE process, and six in 10 of those intend to ask their accountant for advice, according to a survey of SMEs by NEST. Keeping on top of these changes in legislation and understanding what this means for businesses is key in order for accountants to guide their business clients through these legislative complexities. It remains to be seen what will happen to the thresholds after March 2016. However for now, we are about to hit the biggest year yet for AE – don’t let you or your client get left behind.
David White is managing director of Creative Auto Enrolment.
AccountingWEB has launched the No-one gets left behind campaign to alert as many accountants as possible to the obligations implied by auto enrolment. Read our simple eight-point statement which sets out the auto enrolment facts you need to know.