Hired Carer or Nanny May Require Workplace Pension Scheme (UK)

By Ryan Smith –

Do you hire a personal carer or a nanny for your household? Be aware, you now need to make provisions for their pension fund.

Under a law introduced back in 2012, all employers in the UK must offer a workplace pension to their eligible workers. Starting in October 2012 with the biggest companies, the plan is to phase the auto-enrolment scheme out to all employers by 2018.

The aim is to encourage more workers to contribute to their futures as more and more employers move away from traditional defined benefit and final salary pension schemes. Employees can then control their own pension fund in order to use it for the purchase of an annuity, choosing to enter income drawdown or withdraw the whole pot once they retire.

From 1 June 2015, small businesses employing up to 30 staff will gradually be obliged to offer their eligible employees a workplace pension plan – and this could now include employers who only employ one worker, or face a fine of £400.

An eligible employee is somebody who is:

• Not currently in a suitable workplace pension
• At least 22 years of age (but below their current State Pension Age)
• Earning more than £10,000 per year (2015/16 tax year)
• Working in the UK

New research has just been released by NOW: Pensions that reveals around 27 per cent (350,000) of small businesses are at risk of being struck with the fine as they haven’t given any thought to pension provisions for their workers, or they’ve ignored their auto-enrolment duties. The fixed penalty notice of £400 could then escalate, to between £50 and £10,000 per day.

Employer’s Example

If you are due to start providing your employee (or employees) with a workplace pension it is worth understanding just what your financial obligations are to their contributions.

Your contributions must be at least 1% of the eligible employee’s salary (rising to 2% from October 2017 and 3% in October 2018).

A worker being paid £15,000 is entitled to a minimum 1 per cent contribution on their yearly salary. The first £5,824 of income is not taken into account.

A minimum 1% contribution from the employer will amount to an additional £91.76 per year (rising to £183.52 and £275.28 per year in Oct 2017 and 2018 respectively).

The employee is also entitled to an additional tax relief contribution from the government, meaning should they be contributing 1% of earnings, 0.8% of it comes from their salary, and the additional 0.2% from the government.

The Money Advice Service has a useful Workplace Pension Contribution Calculator to help you to plan, though your accountant or an independent financial advisor will get you fully prepared for any other financial implications that may occur.

Low Paid Workers

Eligible employees for auto-enrolment into a workplace pension plan must be earning over £10,000 per year from your employ. But what about employees who do not earn this amount? Or those under the age of 22?

By law, you are not required to set up a workplace pension scheme for these employees. But they are entitled to ask to be auto-enrolled if they so desire; it then becomes law for you to set up a workplace pension scheme and make the required contributions.

Those workers who are classed as self-employed, whose services you may use are not eligible for any form of pension scheme from an employer.

Opting Out

Since its introduction in 2012, the auto-enrolment scheme has been deemed a success, with around 90% of people enrolled into a workplace pension choosing to stay. Many of those who opted-out were people later in their working life such as those close to retirement or those who already had pension provisions set up privately.

While all employees have the option to opt-out, they must first be auto-enrolled into a pension. They then have a limited period (usually around one to three months) to opt out and receive a refund on their contributions.

As an employer, you must not ask any worker to opt-out of the plan. Those found guilty of persuading an employee to opt-out of their workplace pension scheme will face a hefty fine, with over 150 firms already being hit since the auto-enrolment scheme commenced.

Setting up a Workplace Pension scheme

In order to arrange pension provisions for your employees, you need to set up a workplace pension with a pension provider. You may be able to arrange this through your payroll scheme if you use one, though if anything goes wrong, ultimately it is your responsibility.

For official details on setting up an auto-enrolment pension plan for your employees, there is a wealth of information on The Pensions Regulator site and the official Government site.

Ryan Smith is part of the content development team at My Retirement Options, pointing people in the right financial direction during retirement