What pension auto-enrolment means for PAYE contractors

For some time now, the UK’s inhabitants including its contractors have been living longer but a growing chunk of the population is still not saving for retirement. The government is therefore bringing in new legislation to try to ensure that we’re all better prepared, financially, for retirement.

Pension auto-enrolment already underway

So since last month, employers have started to automatically enrol workers into a workplace pension, based on certain criteria – mainly age and earnings. Unlike many announcements by the government about ‘workers,’ auto-enrolment and its mantra of ‘We’re all in’ does apply to contractors. Moreover, the impact of pension auto-enrolment on umbrella company contractors has been said to be more involved than it is for their limited company counterparts.

What your agency or umbrella must do

Larger employers will be affected first, but all employers – including umbrellas and those recruiters who pay workers directly – will have to comply with the legislation over the coming months.

In particular, contributions from employers will be mandated at a minimum of one per cent of qualifying earnings initially, rising to three per cent by 2018. As for employees - in other words the contractors on the books of an umbrella or recruitment agency, they must also contribute no less than one per cent, rising to five per cent by 2018.

Contractors paid direct by a recruitment agency

The new pension auto-enrolment legislation is undoubtedly going to have a major impact on all recruitment agencies that pay workers directly – both from an administrative and a cost perspective.

In terms of costs, there are not only pension contributions to consider, but also the costs of setting up the pension scheme where agencies will need to take external and costly advice. In addition, changes will most likely need to be made to internal systems.

In addition, there are also ongoing costs associated with the administration of the pension scheme. Resources will need to be allocated to managing new processes such as assessing workers, opting workers in and out of the scheme, communicating with the pension provider and making the required deductions from workers’ pay.

All in all, we anticipate that agencies employing temporary workers on a PAYE basis could face an initial set-up charge of at least £25,000 (assuming three months' senior internal resources; legal advice, director input, time spent engaging with clients, plus payroll and software upgrades).

This sizeable sum was arrived at having consulted with agencies to find out the steps they intend to take in preparation for the legislation, though the exact cost will naturally vary for each agency.

Contractors paid direct by an umbrella company

Fortunately, we have had a pension scheme in place for over 10 years so we just need to add in the part where all our eligible employees will be automatically enrolled.

Nevertheless, for Parasol the requirement is to enrol those contractors who are deemed eligible into a workplace pension starting from April 1^st 2013.

That will mean automatically enrolling all employees of the umbrella who:

• Are aged between 22 and State Pension Age
• Earn over £8,105* p/a (*subject to change)

Once an employee has been automatically enrolled into the pension scheme, they can stay enrolled but they also have the opportunity to opt-out within a set time period or leave the scheme at a later date.

And finally…

Lastly, while it is fair to assert that the new pensions legislation appears fairly complicated, contractors with reputable and forward-thinking umbrella companies should expect them to make the auto-enrolment process as simple and straightforward  to understand as possible.

As told to ContractorUK by Anita Whittle, chief operating officer at Parasol, an umbrella company for contractors.