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Last updated: 29 May 2024
Workplace pension schemes explained
In a pension scheme for small business the employer contributes to employees’ pension pots. In this article we look at different types of workplace pension schemes.
Workplace pension schemes for small business employees can be a legal requirement. Here, we explain what workplace pension schemes involve and why they’re good for tradespeople.
The best workplace pension schemes will depend on the type of business. When it comes to small business and pensions the starting point is determining whether you need one.
You’ll also have to understand how a pension scheme for small business deals with temporary or seasonal staff. Also, how much the business has to pay into a scheme, what to remember in running a scheme and where to look for a scheme provider.
What is a pension scheme for small business?
Workplace pension schemes are there to help employees save up for when they retire. They do this by making regular payments via their wages or salaries.
Employers also make contributions so the employees’ pension pots grow more quickly.
Workplace pension schemes can be called occupational pensions, company pensions and work-based pensions.
Types of workplace pension schemes
The two main types of workplace pension schemes are:
Occupational pensions
An occupational pension scheme can be either final salary (also called defined benefit) scheme or a money purchase (also called defined contribution) scheme.
Group personal pension and stakeholder pensions
These types of pensions are also run by businesses for the benefit of employees. They are often used for people who are not entitled to auto-enrolment in a workplace pension scheme (see below).
Here, the employer chooses the pension provider and contributions are made from the employee’s wages or salary. The employee has an individual contract with the pension provider, rather than being part of a company scheme
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Benefits of a workplace pension scheme
The government wants to encourage more people to join workplace pension schemes. One of the main incentives to do this is tax relief on pension contributions.
If your business is a limited company and you are a director then a director’s pension scheme might be a good idea. There are further tax advantages to a trade business in paying directors’ pensions.
A workplace pension scheme gives employees guaranteed income when they retire
Workplace pension schemes can be flexible in how much employees and employers contribute
A pension scheme can include life insurance so your family receives a lump sum should you die
A pension can pay out if you have to retire because you are ill
A pension can be passed on to your partner when you die
Does your business need a workplace pension scheme?
HMRC sets out rules for pension schemes for small business. These are based on whether the business has employees.
You can find full details about an employer’s duties in the Pensions Act 2008.
If you need to have a workplace pension scheme, then there is an HMRC process called automatic enrolment that you follow. You have to automatically put employees onto a workplace pension scheme.
Your business doesn’t need auto-enrolment to a workplace pension scheme if you are:
A sole trader
Are a limited company where you are the only employee
There are self-employed pension schemes that help tradespeople to save for their retirement.
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Who is eligible to join a pension scheme for small business?
The key factors determining if you need a workplace pension scheme are having UK-based staff who are:
Aged between 22 and the retirement age
Earning at least £10,000 per year
It’s worth noting that the government is currently considering lowering the age for auto-enrolment to 18.
Pensions for temporary and seasonal staff
Many tradespeople have temporary, part-time and seasonal staff. Also, staff hours and pay rates may vary.
The rules on workplace pension schemes for these types of employees are slightly different. You’ll need to assess their pay in detail to decide if they need to join the company pension scheme.
The Pensions Regulator provides useful information about temporary staff and those who work variable hours.
How much to pay into a workplace pension scheme
The business – and its employees – pay into the workplace pension scheme. The minimum amount an employer has to contribute is 3% of an employee’s earnings.
An employee’s earnings are usually a combination of:
Salary
Overtime
Bonuses
Commission
Statutory pay: sickness, maternity, paternity and adoption
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How to run a workplace pension scheme
Once a business needs to have a workplace pension scheme its legal duties begin. Under auto-enrolment rules, every employee entitled to be on the workplace pension scheme has to be contacted.
Keep employees updated
If you use a pension provider (see below) they will probably do this for your business. The Pensions Regulator offers handy support in how to write to staff about their workplace pension scheme.
Monitor and review your workplace pension scheme
It’s important to make sure everyone who is entitled to be on your workplace pension scheme has joined up. When new staff join and they are eligible they need to be added. And when staff leave they should be taken off the scheme.
Maintain accurate records
Pension schemes for small business are usually long-term financial commitments. Keeping accurate and up-to-date records is essential. This includes details about pension contributions made by employees and employers. You should also keep records about leavers and joiners.
Choosing a workplace pension service provider
We always recommend that you talk about workplace pension schemes to your accountant or financial adviser.
If you choose a pension provider to run your scheme you should select a company that is regulated by the Financial Standards Authority. The FSA provides advice on avoiding pension scams.
The Pensions Regulator lists a number of recommended pension schemes. The Federation of Small Businesses provides its members with a workplace pension scheme.
FAQs
Does a trade business need to have a workplace pension scheme?
It does if it has employees who are eligible and must automatically be put on a workplace pension scheme.
What are the benefits of a pension scheme for small business?
The benefits of having a workplace pension scheme include tax relief on contributions and a guaranteed income on retirement.
What different types of workplace pension schemes are available?
The main types of workplace schemes are occupational pensions, group personal pensions and stakeholder pensions
What are the best workplace pension schemes?
It depends on things like the type of business and how many employees it has. There are a lot of pension providers to choose from, so it’s probably best to start by talking to your accountant or financial adviser.
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