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From 1st June 2015, small businesses with fewer than 50 employees will face changes in the pension laws. The legislation states that all employers with one employee or more must enrol them into a company pension scheme.

Employees who fulfil specified criteria will have to be enrolled, some of them for the very first time. The legislation was introduced to address the problem of employees reaching retirement age with very little or no savings. The enrolment for small businesses is between 1st June 2015 and 1st April 2017. Larger employers – 33,000 in total – have already complied with the changes.

According to the director of external affairs from the National Association of Pension Funds, over 17 million people are members of 1,300 pension schemes. Graham Vidler states that the number of people who are signed up to a company pension has risen for the very first time.

Although the pension changes are good news for those who can now look forward to extra income to supplement their state pension, UK SMEs may face additional costs when implementing the scheme. Any employee aged between 22 and the state retirement age who earns above £10,000 and isn’t already in a pension scheme will have to be auto enrolled. A small company will face the cost of contributing to a company pension, the cost of upgrades to payroll and the cost of increased administration.

What is a company pension?

A workplace pension is sometimes known as a ‘works’ or ‘company’ pension, or an ‘occupational’ pension. It is designed to help employees save towards their retirement. A small amount is deducted from your salary and added to the pension every time you are paid, usually at a fixed percentage. Employers generally make a contribution too, and employees receive tax relief on the amount they pay in to a scheme.

Usually, a lump sum is paid when you reach retirement age, with the remainder paid as a regular income. Although the lump sum is liable to tax, 25 per cent of it is taken tax free.

Type of workplace pension

The employer decides which of the two main types of pension an employee will be offered – the defined benefit pension scheme, or the defined contribution pension scheme.

The latter is sometimes known as a ‘money purchase’ scheme, whereby the employer selects a pension provider that invests the contributions made. The final amount at retirement will depend on the amount paid in, the length of the investment and its performance. The defined benefit pension scheme is based on the final salary, and the amount an employee receives is based on the salary and length of service.

As auto enrolment is complex, seeking professional advice can be a cost-effective decision for an employer. If you have made changes to your pension scheme or would like advice, contact us here at The Accountancy Partnership.

About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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