If you employ someone directly – even just one person – then you are required to enrol them into a pension scheme into which you both contribute. This is known as auto-enrolment.
This guide is mainly intended for employers, so it will apply if you are setting up a business or employing a carer or nanny who doesn’t work for an agency. If you are an employee, you can read more about auto-enrolment in our article How does pension auto-enrolment work?.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
When do I need to enrol an employee into a pension scheme?
If you employ one or more people, you must auto-enrol them into a pension scheme, assuming the following is all true:
- You employ them yourself. if you contract someone who works for an agency, then their agency is responsible for auto-enrolment
- They earn over the auto-enrolment threshold, which is currently £10,000 a year. These earnings have to all be from the job you employ them to do. If they earn £10,000 from working multiple jobs, you are not obligated to auto-enrol them. If they earn less than £10,000, say because they work for you part-time, you don’t need to auto-enrol them. However, they can ask to be enrolled into a pension scheme and you can’t refuse them, assuming they earn at least £6,240 a year, £520 a month, or £120 a week (this lower earnings limit is expected to be scrapped in the future).
- They are aged between 22 and the current State Pension age, though it’s been proposed that the minimum age should decrease to 18.If they are under 22 or between the State Pension age and 75, they can opt into the scheme, again assuming they earn at least £6,240 a year.
Do I have to set up a pension for a carer?
If you directly employ one or more people to provide care for yourself or a loved one then yes, you need to set up a workplace pension scheme for them and auto-enrol them. You need to do this whether you pay them using your own budget, or through funding from your local authority or the NHS.
However, if the carer works for an agency and already has a workplace pension scheme, you don’t need to do anything.
How do I choose and set up a pension scheme?
If you are employing a carer, gardener or housekeeper, for example, your easiest option is probably the National Employment Savings Trust (NEST), a government-approved pension scheme that must accept any employer that wishes to join. It’s designed to be accessible for new employers and will take you through what you need to do step-by-step. You can read more about it in our article What is a Nest pension and how does it work?
However, you can choose a different scheme if you wish, as long as it’s registered in the UK, doesn’t require staff to do anything to join or choose their own investments, and requires a minimum level of contributions. Some schemes will only accept employers with a certain number of employees or employees who make a certain amount.
Pension schemes will charge both you and your staff for use of their services, so factor these costs into your decision as well – the employer charge may be a one-off fee or an ongoing one. You’ll also need to take certain tax relief policies into account if your employee either is a higher rate taxpayer or doesn’t pay income tax. If you need assistance choosing a pension provider, a financial advisor can help you find a scheme that is suitable for you and your employee(s). You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
How much do I have to contribute to my employee’s pension?
Contributions to an employee’s pension are made by both you (the employer) and by your employee from their income (plus pension tax relief from the government). These contributions are usually calculated as particular percentages of your employee’s earnings, but the exact percentages – and what counts as earnings – depends on which ‘earnings basis’ you use.
You can either go by qualifying earnings, which refers to a specific amount between two set thresholds, or by pensionable earnings, which is subdivided into three different “sets” you can choose from. It’s generally up to you to decide which earnings basis to use, rather than your pension provider.
All options allow you and your employee to contribute extra if either if you wish.
Qualifying earnings
Qualifying earnings is the earnings basis used by the majority of employers and refers to earnings between £6,240 and £50,270 (though this the lower threshold is expected to be scrapped), including salary, bonuses, overtime, and statutory sick or maternity pay.
The minimum overall contribution to your employee’s pension is 8% of their earnings over the current lower threshold, and up to the upper threshold. As the employer, you have to contribute at least 3% of this, with your employee making up the remaining 5%. If your employee chooses to contribute more to their pension from their income, it’s up to you whether you want to increase your contribution as well.
So, for example, if your employee earns £40,000 a year through the work they do for you, you would contribute 3% of their earnings over the lower threshold to their workplace pension. That’s 3% of £33,760 (£40,000 minus £6,240), which is £1,012.80 a year. They would make up the remaining 5% (£1,688) out of their income, for an overall yearly contribution of £2,700.80.
We’ll update this guidance if the law changes and the lower threshold gets scrapped, as the government has proposed. Find out more in our article Low paid to benefit from auto-enrolment pension changes.
Pensionable earnings
There are three different methods of calculating pension contributions based on what are called pensionable earnings – these are called pay sets.
- Pay set 1: contributions are calculated as 9% of your employee’s basic pay. Basic pay effectively refers to just their salary and excludes bonuses, overtime, statutory pay etc. You contribute 4% and your employee contributes 5%.
- Pay set 2: contributions are calculated as 8% of your employee’s basic pay, with you contributing 3% and your employee contributing 5%. However, for you to use this set, their basic pay must make up at least 85% of total earnings (so bonuses, overtime, etc. must account for 15% or less of total earnings). As the employer, it’s up to you to monitor this. If your employee’s earnings change a lot year-on-year, you will normally have to use past years as a basis to see whether they are likely to meet the 85% minimum before going ahead with pay set 2.
- Pay set 3, also known as total pensionable earnings: contributions are calculated as 7% of total earnings, including bonuses, overtime, etc., with 3% from you and 4% from your employee.
What else am I responsible for as an employer?
Your duties as an employer are not just limited to pension provisions. Most importantly, you need to use HMRC’s Pay As You Earn (PAYE) system, which is used to collect income tax and pay National Insurance contributions for your employees. Most employers have to pay monthly, but small employers who expect to pay less than £1,500 can arrange to pay quarterly instead.
Final thoughts
If you need to hire a carer but are worried about the cost of doing so, take a look at our Paying for care section for some useful resources.
Or, if you’re planning on starting a business and are likely to employ people to help you, check out our article Eight tips if you’re starting a business in your 50s for some more advice.
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