It was five years ago this month that the government kicked off a huge shakeup of retirement saving to get millions more people paying into a pension. So far, â€œautomatic enrolmentâ€ is looking like a big success â€“ but the phasing-in period is now officially over, with new rules taking effect last weekend that will impact people who set up a new business, take on a nanny or pay forÂ a carer.
Auto-enrolment went live on 1Â October 2012 and requires all employers to automatically enrol eligible workers into a workplace pension where both the worker and their employer pay some money in. To date, more than 8.5 million people have been enrolled, many of whom will never have saved in a pension before. Workers can â€œopt outâ€, ie, say no to being put into the pension scheme. But they canâ€™t do so until after they have been enrolled.
Big companies such as supermarkets were the first to sign up to the regime, but more recently the focus has switched to the millions of small and â€œmicroâ€ employers. As the Pensions Regulator puts it: â€œIf you employ just one person, then you are an employer and have â€˜dutiesâ€™ under pensions law.â€
Of course, many of the smallest employers donâ€™t think of themselves as such â€“ they are individuals who just happen to have someone who works for them. That includes families who employ a nanny and people who employ a personal care assistant to help them with their day-to-day needs (if you pay for a personal care assistant using your own money, or money provided by your local authority or the NHS, you are judged to be an employer). Under the rules, many of these â€œemployersâ€ will have to set up a pension plan for their nanny/carer, and pay into it.
Employers must automatically enrol any employee who, on the date the law applies to them, is at least 22 years old but below state pension age; earns more than a minimum amount (currently Â£10,000 a year, the same as Â£833 a month or Â£192 a week); and is not in a workplace pension scheme. Some nannies and personal care assistants wonâ€™t meet these criteria because they donâ€™t earn enough.
Up until now, employers have typically been given advance notice of the date when their auto-enrolment duties come into effect. This was known as their â€œstaging dateâ€ and gave people time to get their ducks in a row. Previously, many employers received an official letter 12 months before their staging date.
But on 1 October, so-called â€œinstant pension dutiesâ€ took effect, and no more staging dates are being issued. Instead, anyone who starts up a new business or takes on a nanny/carer etc will have a legal duty to put an eligible employee straight into a workplace pension as soon as they employ him or her. In other words, they will have to provide a â€œstaff pension planâ€ right from the start.
This will be a daunting prospect for many. However, the Pensions Regulator has launched an online set of information and tools for those employing staff for the first time.
There are a number of payroll companies out there offering to help people comply with their pension duties and deal with the admin, in return for a fee. Nannytax is one such firm â€“ it describes itself as the UKâ€™s leading nanny payroll provider. A spokeswoman for the company says its employer clients have reacted in different ways to being brought into the new pensions regime. While some see this as another cost they have to shell out for, others view it as â€œa really good thingâ€ that their nanny is being encouraged to save for their retirement in this way.
One thing thatâ€™s not clear is what impact next yearâ€™s increase to pension contributions (see below) will have. Elliott Silk at investment company Sanlam UK says: â€œThe rise from 2% to 5% coming into force in April 2018 will be a steep one felt by workers all across the country â€“ the government, employers and wider industry need to prepare those who are likely to be affected by the increase, otherwise many people will be in for a big shock when they check their pay packet in April. We are encouraging employers to get the message out there early and provide financial education to their staff, highlighting the importance of saving and thinking beyond the minimum.â€
So, if you employ a nanny or personal care assistant, how much might you â€“ and they â€“ have to pay into their pension? The answer is potentially quite a lot. By 2019-20 it could be Â£500-Â£600 a year each.
Under automatic enrolment, the total minimum amount paid in is currently 2% of qualifying earnings â€“ typically made up of 0.8% from the worker, 1% from their employer and 0.2% in tax relief from the government.
However, in April next year this will rise to 5% (typically 2.4% from the worker, 2% from their employer and 0.6% in tax relief); and in April 2019 the total minimum contribution will ratchet upwards again to 8% â€“ typically 4% from the worker, 3% from their employer and 1% in tax relief.
Just to complicate matters further, these percentages donâ€™t apply to all of an individual workerâ€™s salary, only to their â€œqualifying earningsâ€. This is what they earn over a minimum amount, currently Â£5,876 a year, and up to a maximum amount, currently Â£45,000 a year.
Letâ€™s take the example of a nanny on a net wage of Â£350 a week. This translates into a gross wage (ie, before deductions) of Â£21,932 a year. According to Nannytax, which crunched the numbers for us, the employer contribution would be Â£160 a year (Â£3.09 a week), while the nannyâ€™s would be Â£128 a year (Â£2.47 a week).
But these contributions will leap to Â£321 (Â£6.18 a week) and Â£385 (Â£7.42 a week) respectively in April next year; and from April 2019 onwards the employer will be coughing up Â£482 a year (Â£9.27 a week), while the nanny hands over Â£642 a year (Â£12.36 a week). Though donâ€™t forget that the tax relief will also increase, too.
Nannytax points out that the lower earnings threshold changes at the start of every tax year, and we donâ€™t yet know what it will be in April 2018 and April 2019, so it has to use the current Â£5,876 figure for the calculations. There is a calculator on the firmâ€™s website that people employing a nanny can use to work out their pension costs.
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