Pension schemes for small businesses: What you need to know

Whether you’re a small business owner already, or you’re about to set up a brand-new venture in the near future, it’s safe to say that workplace pensions might not be the first thing on your mind.

However, even as a small business owner, it’s essential that you put in the effort to meet your legal obligations regarding your employee’s pensions, and that you secure your own financial future – after all, when you’re self-employed, you’re entirely responsible for both of these aspects.

So, if you want help setting up a pension scheme for a small company, and want to know more about the best pension providers for small employers, read on to learn more about what your legal obligations are, and what self-employed people can do to keep on top of their pension pot.

Am I legally required to provide a pension as a small business?

Regardless of the size of your company, every single employer in the UK is legally obliged to provide a workplace pension for all eligible employees, following auto-enrolment rules introduced in 2008.

This is true even if you only have one employee, for instance, a nanny for childcare, and your legal obligations start on the day your first member of staff starts working for you, which is known as your “duties start date”.

No matter what, eligible employees must be enrolled into a scheme, and you will have to pay employer contributions into their pensions to match their own. And even if your employee isn’t eligible for a pension – for instance if they’re under 22 years old – you still have pension-related duties that you must carry out.

What are my small business pensions duties?

If you currently have pension-eligible employees, or plan to hire pension-eligible staff in the near future, you are legally required to do the following:

• Choose a pension scheme that can be used for auto-enrolment.
• Enrol eligible employees into the scheme.
• Work out how much you need to contribute on their behalf and set up payments.
• Write to your staff and explain how automatic enrolment applies to them.

Templates for how to do this can be found on The Pensions Regulator website, and it’s important to remember that you must declare your compliance to the Pensions Regulator (TPR). TPR has a helpful checklist which tells you what information you need to provide.

When do employees need to be enrolled for their pension?

You need to enrol your employees from your pension duties start date, so, ideally, you should have a pension set up before they begin working for you. You’ll also need to give your scheme provider all the information they need to set up your employees within the scheme and keep them updated on a regular basis.

Please be aware that, if you fail to do your declaration of compliance within five months of your duties start date, you will have to pay a fine.

What duties do I have to non-pension employees?

If any one of your employees is not eligible for a pension, then you are still legally required to do the following:

• Work out how much each of your employees earns and check their age to make sure they are not eligible on your duties start date.
• Write to your employees within six weeks concerning pension enrolment and when they will be eligible.
• Do a declaration of compliance within five weeks.
• Monitor the ages of your staff and their pay levels in case they become eligible.
• Enrol any ineligible employees who ask for an automatic start.

Which employees are eligible for a pension scheme?

When setting up a pension scheme for a small company, you need to auto-enrol any staff who are both:

• Between the age of 22 and the state pensions age of 66.
• Earning more than £10,000 per year (£833 per month or £192 per week).

Employees who are ineligible can still ask to be put into a pension scheme. If they do, you’ll need to set one up for them.

As for whether you’ll need to pay in employer contributions, this will depend on how much they earn. If their annual salary is more than £6,240, you must make contributions, if it’s lower than that you don’t legally have to, but you could choose to do so anyway.

How much are do I need to contribute to my employee pension scheme?

In terms of the legal contributions that you’ll need to make, the current legal minimum contribution required is 3% of your employee’s salary, while your employee must pay 5%, however, you can choose to pay more than this.

With that being said, such percentages are calculated on qualifying earnings level, which are any earnings between £6,240 and £50,270 a year (£520 and £4,189 a month, or £120 and £967 a week), and these figures are reviewed each year by the government.

Therefore, when calculating pension contributions, you must include salary, commission, bonuses, overtime, statutory sick pay, statutory maternity pay, statutory paternity pay, and statutory adoption pay.. Fortunately, the regulator has a handy contributions calculator that you can use to work out costs for every member of staff.

While these minimums are enshrined in law, there are plenty of companies out there that offer more generous pension schemes. For instance, many offer something called matching, where you agree to pay more if your employees do, up to a certain limit, which can be a powerful recruitment and retention tool.

When are my pension contributions due?

For all businesses, contributions must be paid by the 22nd of the Month after the employee receives their first pay cheque. For instance, if an employee was paid on the 19th of April, your contributions would need to be in the scheme by the 22nd of May at the latest.

You can do this manually yourself, however, most payroll providers are set up to automatically deduct auto-enrolment contributions. If yours isn’t, TPR’s website provides comprehensive advice on what to do.

Alongside this, for new employees, or ones who are being enrolled for the first time, some scheme providers allow you to pay the first three months’ contributions on the fourth month, which can help if employees choose to opt out and get a refund.

Bear in mind that you need to swiftly update your provider with any pay rises or changes to contributions. Likewise, you will need to tell them when someone joins or leaves the pension scheme.

Which are the best workplace pension providers for small employers?

With so many pension providers available in the UK, it’s difficult to say just which pension providers are the best for small businesses. However, a financial adviser will be able to help you choose and set up a scheme if you don’t feel confident doing it yourself.

For example, the TPR has a useful list of schemes that have said they are open to taking small employers. These include:

• Creative Pension Trust
• Cushon Master Trust
• The Lewis Workplace Pension Trust
• National Employment Savings Trust (NEST)
• NOW: Pensions
• Penfold Pension
• The People’s Pension
• Smart Pension Master Trust
• Standard Life Workplace Pension
• True Potential Investments

What to consider when choosing a pension scheme

When looking at any pension scheme, important considerations include how much the scheme will cost, what kind of tax relief method it uses, and whether it can integrate with your existing payroll solutions.

Again, this can be a lot to learn if you’re unfamiliar with finances, but the MoneyHelper retirement advisor directory includes advisers who can help you choose a pension scheme to comply with your automatic enrolment duties.

How to set up a pension if self-employed

If you don’t have employees, you don’t need to set up a pension scheme. However, it is extremely important that you save for your retirement. Unlike people who are not self-employed, you won’t have an employer to do it for you, and the state pension is unlikely to be enough to live on comfortably in retirement.

Fortunately, you can set up a self-employed pension with a company scheme, a Self-Invested Personal Pension, a Lifetime ISA, or by saving into a company pension you already have from past employment.

We’ve outlined some of the more common self-employed pension options below:

• A personal/private pension – This is known as a defined contribution fund. The money you save is typically invested in a wide range of assets. You can set one up yourself, or you might already have a workplace pension, if you’ve been employed in the past.
• A self-invested personal pension (SIPP) – This allows you to choose the investments that make up the fund. For instance, you could even use a SIPP to buy your company assets such as factories and offices. You can find out what SIPPs we recommended in our guide to the best SIPPs of 2024.
• NEST – The National Employment Savings Trust is a government-backed workplace scheme. It was designed to help small employers offer a pension, but self-employed people can use it too. However, if you’re a company director and self-employed, you cannot pay company contributions without going through auto-enrolment.
• Lifetime ISA – This is an ISA designed to save for your first home or for retirement. The government will top up annual savings by 25% up to a limit. You can save up to £4,000 a year, and you’ll get up to £1,000 topped up. However, you can’t access the money for retirement until you’re 60, unless you’re buying a first property that meets the criteria. Other pensions let you access the money from 55 (rising to 57 from 2028), so it’s important to compare what you’ll get from a LISA vs a traditional pension before making your choice.

How much should I put in my pension when self-employed?

While there is no set budget for how much you should be putting in your pension each month, most experts agree that a good rule to follow is a pre-tax contribution of half your age.

For example, if you’re 30 years old, you should be putting away 15% of your monthly salary before tax each month.

How does pension tax relief work?

When you save into a pension, the government likes to give you a bonus as a way of rewarding you for saving for your future. This comes in the form of tax relief. 

When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.

Said tax relief is paid on your pension contributions at the highest rate of income tax you pay, based on the following:

• Basic-rate taxpayers get 20% pension tax relief.
• Higher-rate taxpayers can claim 40% pension tax relief.
• Additional-rate taxpayers can claim 45% pension tax relief.

However, in Scotland, income tax is banded differently, and pension tax relief is applied in a slightly alternative way.

How much can you save in pension tax relief?

The government spends billions of pounds every year on pensions tax relief and, therefore, places a cap on the amount you can save every year, upon which you can earn relief. 

This cap is known as the 'pension annual allowance', which is rising to £60,000 in the 2023-24 tax year, or 100% of your income if you earn less than £60,000.

If you earn more than £220,000 (known as 'threshold income') and your 'adjusted income' is more than £260,000, your annual allowance starts to fall. This is known as the 'tapered annual allowance'.

If you earn through a mixture of dividends and salary, it’s important to note that only the salary counts when calculating your annual allowance. If you want to save more, you can do it via company contributions.

Making company contributions

If you have a limited company, you can also make company contributions into your pension. This can be a smart way to save for the future, as these payments will reduce the amount of corporation tax that you pay. However, not all pension schemes allow company contributions so check carefully before choosing a provider.

Become a Which? Trusted Trader

And there you have it, that’s everything you need to know about setting up a pension scheme as a small employer. Again, this sort of thing can be rather complex, so if you’re still unsure about the specifics of what you need to do, we recommend speaking to a financial advisor as soon as possible.

Of course, if you’re self-employed and looking for ways to contribute more to your personal pension, then one of the best ways to do this is by becoming a Which? Trusted Trader.

While we can’t contribute directly to your pension, being a Trusted Trader is a fantastic way to grow your business by giving your customers confidence that you’re an expert in your trade.

Better yet, by joining our Trusted Trader scheme, you’ll get your own business profile to display reviews and previous work, as well as a dedicated accounts manager to help you monitor your page.

Get in touch with our team today to find out more about becoming a Which? Trusted Trader, and don’t forget to visit our business advice hub for more useful articles like this one.

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