Auto-enrolment - exemptions and exceptions
It’s now some time since we passed the final staging date, 1 February 2018, for companies or individuals that employed someone before 1 October 2017. If you didn’t employ a member of staff before 1 October 2017, your automatic enrolment duties start on the day your first employee started work (known as your duties start date).
Taken together this means that automatic enrolment is now ‘live’ for all businesses in the UK that have employees, regardless of the size of the business.
However, not all businesses have automatic enrolment duties. The reason for this is many, mostly smaller, companies aren’t considered to be an employer. On top of this, even if you’re an employer, you may not need to enrol, or re-enrol, certain workers into a pension scheme.
Let’s take a look at the circumstances when a company or individual isn’t an employer and exempt from automatic enrolment
You won’t have automatic enrolment duties if any of the following conditions apply;
- You’re the sole director of your company and you don’t have any other staff
- Your company has more than one director, but none of them have a contract of employment (this doesn’t need to be in writing, it could be verbal or implied), and you don’t have any other staff
- Your company has more than one director, but only one of them has a contract of employment, and you don’t have any other staff
- Your company has stopped trading, gone into liquidation, or been dissolved
- You no longer employ people in your home, for example a nanny or a cleaner.
If any of the above apply to you, and you’ve received a letter from The Pensions Regulator (TPR) about your automatic enrolment duties, you’ll need to complete a form to tell them you’re not an employer. You’ll need your PAYE reference and the TPR letter code to hand.
Automatic enrolment and re-enrolment exceptions for employers
The government acknowledges that automatic enrolment isn’t suitable for everyone. It’s not necessary for some individuals, for example company directors, who aren’t in the target audience for automatic enrolment.
A number of exceptions are now available, which means an employer’s duties in relation to certain workers are changed or don’t apply. Knowing about these exceptions can help to reduce at least some, if not all, of the automatic enrolment burden.
You can choose whether or not to automatically enrol, or re-enrol, a worker into a pension scheme in the circumstances we’ll outline below.
Where one or more of the these exceptions apply, the safeguards in place to protect the rights of individuals to have access to pension savings under automatic enrolment, including those relating to inducements and prohibited recruitment conduct, continue to apply. More details on the safeguards can be found in TPR’s guidance.
It’s worth noting that even where an exception applies, a worker will, unless otherwise stated, still have the right to opt-in or join your pension scheme, so you may need to issue them with appropriate communications.
- Former pension scheme members
You have the choice of whether or not to automatically enrol, or re-enrol, a worker who’s an eligible jobholder and who, at their request, stopped active membership of your qualifying pension scheme (or a scheme that would have been a qualifying scheme if they’d been a jobholder) within the previous 12 months. This is the case whether they left the scheme through opting out during the opt-out period or stopped active membership under the scheme rules. This exception applies even where the date the individual stopped active membership was before your staging date/duties start date.
- Notice of termination of employment
Under this exception you can choose whether to automatically enrol, or re-enrol, a worker who has handed in, or been given, their notice to terminate employment. It applies regardless of whether the worker has resigned, been dismissed or is retiring. Notice of termination of employment must have actually been given, so it doesn’t apply to workers who are at risk of redundancy or dismissal. Nor does the exception apply to workers on fixed-term contracts. If the notice of termination of employment is withdrawn, this exception no longer applies and the normal employer duties start to apply to the worker in full. Where this exception applies, a worker doesn’t have a right to opt-in or join your pension scheme, but you have the option to allow them to do so.
- Tax protected status of pension savings
Workers who have built up pension savings close to, or more than, the lifetime allowance, £1.03 million in 2018/19, increasing to £1,055,000 in 2019/20, may have obtained a form of fund protection from HM Revenue and Customs (HMRC) that shields at least some of their pension savings from a lifetime allowance charge.
Some forms of fund protection, for example enhanced and fixed protection, can be lost if a worker is automatically enrolled into a pension scheme and doesn’t subsequently opt- out during the opt-out period. To simplify things, if you’ve reasonable grounds to believe that a worker has any of the available lifetime allowance protections, whether it would be lost upon automatic enrolment or not, you can choose whether or not to automatically enrol, or re-enrol, that worker. To have ‘reasonable grounds to believe’ they have a form of fund protection, you must have been given some form of evidence of the protection’s existence. For example, sight of the individual’s protection certificate received from HMRC, or some other form of documentation from the worker.
- Company directors
Not all company directors are workers, for example if they’re a sole director of a one person company, regardless of whether they have an employment contract or not. If a director isn’t a worker, they’re always exempt from automatic enrolment.
Where an individual who holds the office of director with your company is a worker, you can choose whether or not to automatically enrol, or re-enrol, them. This exception doesn’t apply to a worker who is a director in name only. For a company, they must be a director formally appointed under the Companies Act 2006, or have a decision-making role in the corporate governance of the company.
- Partners of limited liability partnerships (LLP)
If your business is structured as an LLP, you can choose whether or not to automatically enrol, or re-enrol, an individual who is a member of your LLP. This means a genuine partner, not a ‘salaried member’, who’s in receipt of qualifying earnings from your LLP, but who isn’t treated for income tax purposes as being employed by your LLP.
- Winding up lump sums
When a defined contribution pension scheme is winding up, pension savings for an individual of up to £18,000 can be commuted for a lump sum, provided certain conditions are met. This is known as a winding up lump sum, a term that’s defined in the Finance Act 2004. One of the conditions for the payment of a lump sum like this is that the employer must undertake not to contribute to a pension scheme for that individual in the 12 months following payment.
This exception applies where a worker has received a winding up lump sum, they are no longer to be employed by you, but then become re-employed by you, and they become eligible for automatic enrolment, or re-enrolment (all within a 12 month period of the lump sum being paid). In these circumstances, you’ve the choice of whether to automatically enrol, or re-enrol, the worker into your pension scheme. During the 12 month period, the worker doesn’t have a right to opt-in or join your pension scheme.
The importance of getting it right
As with most aspects of automatic enrolment, there are several technical details when it comes to exemptions and exceptions.
So if you think you’re a business that’s exempt from automatic enrolment duties, or you have workers you don’t wish to automatically enrol, or re-enrol, then the first thing you should do is speak to a financial adviser. It’s possible you could incur penalties or fines if you get things wrong.
If The Pensions Regulator agrees that you don’t have any duties, they’ll write and confirm this with you.