Your pensions obligations as a small business

Whether you’re a small business owner already or about to set up a new venture, pensions are often the last thing on your mind. 

However, you must ensure that you’re meeting your legal obligations, and it’s important to remember that when you’re self-employed you’re entirely responsible for your financial future. 

Here, Which? explains what your legal obligations are if you are an employer, and we share our advice on what self-employed people can do to keep on top of their pension. 

Advice for Trusted Traders with employees 

Every single employer in the UK must provide a workplace pension for 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. 

Your legal obligations start on the day your first member of staff started working for you, which is known as your “duties start date”. 

Eligible employees must be enrolled into a scheme, and you will have to pay employer contributions. Even if your employee isn’t eligible for a pension – for instance if they’re under 22 years old, you still have duties you must carry out.

What are my duties?

If you have eligible employees or plan to hire people, you must:

• 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 can be found on The Pensions Regulator website. Declare your compliance to the Pensions Regulator (TPR). TPR has a helpful checklist which tells you what information you need to provide.

You need to enrol your employees from your duties start date, so ideally you should have a pension set up before they begin working for you. You’ll 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.

If you fail to do your declaration of compliance within five months of your duties start date, you will have to pay a fine.

If you don’t have any eligible employees, you must still:

• 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.
• 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.

Which employees are eligible?

You will have to auto-enrol any staff who are both:

• Between the age of 22 and state pensions age, 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. 

Whether you’ll need to pay in employer contributions for them depends on how much they earn. If their annual salary is more that £6,240, you must make contributions, if it’s lower than that you don’t have to, but you could choose to.

How much are contributions?

There are legal minimum contributions, but you can choose to pay more than this. 

Currently, employers must pay 3%, but you can choose to pay more. Eligible employees pay 5%. 

However, these percentages are only worked out on qualifying earnings.

These are earnings between £6,240 and £50,270 a year (£520 and £4,189 a month, or £120 and £967 a week). These figures are reviewed each year by the government.

When calculating pension contributions, you must include salary, commission, bonuses, overtime, statutory sick pay, statutory maternity pay, statutory paternity pay, and statutory adoption pay.

The regulator has a handy contributions calculator that you can use to work out costs for every member of staff.

Some 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. 

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

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

You will 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.

While the minimums are enshrined in law, there are plenty of companies 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. This can be a powerful recruitment and retention tool. Speak to your scheme provider to find out more.

How to choose a pension scheme

You can pay an adviser to help you choose and set up a scheme, or you can do it yourself.

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

• 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

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.

The MoneyHelper retirement advisor directory includes advisers who can help you choose a pension scheme to comply with your automatic enrolment duties.

Advice for self-employed Trusted Traders 

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.

You could do this by setting up a company scheme, by getting a Self-Invested Personal Pension, by using a Lifetime ISA, or by saving into a company pension you already have from past employment.

• A personal / private pension: This is 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 found out what SIPPs we recommended in our guide to the best SIPPs 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). You can find out how they compare to traditional pension here. 

 Tax relief on your pension explained 

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.

Tax relief is paid on your pension contributions at the highest rate of income tax you pay. So:

• 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

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

How much can you save?

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 '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.

The more you save, the better your retirement will be. Use our calculator to make sure you’re on track.

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.

Not all pension schemes allow company contributions so check carefully before choosing a provider.