Limited company contractors failing to take action over pensions auto-enrolment face steep fines even if they believe that their business is exempt.
Contractor Wealth's pensions and investments expert Angela James warns contractors that by ignoring letters from the Pensions Regulator regarding auto-enrolment, they could be fined £400 for a first offence, rising into the tens of thousands for ongoing offences.
“The vast majority of limited company contractors are exempt from pensions auto-enrolment but they still need to tell the regulator,” highlights James. “This means contractors should be proactive and, if they have not received a letter already, tell the regulator about their company’s status.”
How can contractors be exempt from pensions auto-enrolment?
According to James, the exemption criteria are quite straightforward: “A contractor’s limited company will be exempt from auto-enrolment if:
- There is only one director and there are no employees working for the company
- The only people working for the company are directors and no one has an employment contract
- The only people working for the company are directors and only one person has an employment contract
- The company has ceased trading
- For any other reason the contractor believes they do not have auto-enrolment duties.”
In James’ experience, nearly all classic contractors, including both one person companies and husband and wife/civil partnership teams, are exempt. Only those with growth ambitions who have hired employees will need to take action.
Every business in the UK has what’s known as a staging date, which is the deadline by which the business must have taken action on pensions auto-enrolment. For many UK businesses, that means setting up an approved pension scheme, but for most contractors it means telling the Pensions Regulator that they are exempt.
Contractors must be proactive, if the regulator does not make contact
In theory, the Pensions Regulator should write to every business to tell them the staging date and ask what actions they plan to take about auto-enrolment.
However, James urges contractors who have not heard to be proactive: “It is the company owner’s responsibility to comply with the legislation, not the regulators. So, contractors should go online and find out their staging date.
“Having determined whether they are exempt or not, and what action they plan to take as a result, they should then write the regulator informing it of their status and plans. For most contractors, this will be a letter confirming they are exempt and the reasons why.”
What happens if a contractor’s company is not exempt?
Businesses that are not exempt may have to set up a group scheme for their employees, such as the Government’s NEST workplace pension scheme and the employer must subsidise the scheme. This is costly and requires a payroll system and middleware that can regularly report to the regulator that auto-enrolment is up and running.
“There is little cost to running a personal pension arrangement, as an alternative to a group pension scheme,” continues James. “There are no benefits to the employer of running a group scheme, except that the costs and contributions made to employees are tax deductible.
“An employer can use personal pensions that are paid for by the company, tax deductible, are much more flexible for the worker and do not have the costs of a group scheme. Contractors who do not already have a personal pension funded by their limited company should take advantage of the tax breaks pension contributions enjoy, as well as planning for a comfortable retirement.”
James concludes: “The key thing is knowing what their staging date is and what action they need to take. Contractors can’t ignore auto-enrolment and it is the company owner’s responsibility to comply. Failure to take action could be very costly.”