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What is a pension?
A pension in simple terms is a regular payment made by the state and financed by private or public means to ensure that individuals have a source of income to live off when they quit the workforce. The pension works as a tax efficient ‘wrapper’- holding money which is invested in a bundle of reserves to which tax relief is then applied. There are two types of Employer pension schemes:
DCS- Defined contribution schemes are the most common form of employer pension setup. In simple terms, employees are expected to contribute a certain amount of their salary each month. This amount is topped up by the Government based on an employee’s tax rate, and this total is then matched by an equal contribution from the employer. There are limits on how much can be saved each year and receive the benefit from the top up- Employers will also generally limit the % of salary which an employee can contribute.
DBS- Defined benefit schemes on the other hand calculate pension amounts in a different manner. The pension amount uses two factors: the employees’ final salary and the period they have served the company. Clearly this can act as a huge advantage to both a company and its employees- The Company will have a low labour turnover, and employees receive the incentive of a higher pension payment given that they stay with the company.
What are the changes being imposed and what happens if you do not comply?
In 2012 the government began implementing the auto enrolment scheme. This is now mandatory for all employers. Every employer is now expected under the Pensions Act 2008, to enrol all employees automatically into an approved pension scheme by their staging date. Following this set up there is an expectation to maintain to regular contributions into their staff pension scheme. It is the decision of an employee about whether to opt out of this scheme.
Companies which are not compliant with the new regulations can face a penalty of up to £10,000. Failure to make the required contribution payments can face a civil penalty of up to £5000 for individuals and £50,000 for organisations!
What can we do to help?
Our aim at BCDS Accountancy, is to ensure that your company is compliant with the new changes. It is in our best interest to ensure that you are not faced with any of the penalty charges. We can reduce the burden and take care of the pension scheme for your company. Firstly, we need to ensure that you are aware of your companies staging date. This date is determined by law and generally based on the number of people in the largest PAYE scheme used by your company as of 1 April 2012 HMRC records. The date marks the point at which your company has the legal duty to conduct in compliance with the changes, we can help you determine your companies staging date.
We advise all companies to plan before their staging date, and we have the expertise to help! There are a number of costs which will be associated to the company as a result of this change:
1. Contribution costs- You need to plan for regular contribution payments to all employees. Minimum contributions must start at 1% and are proposed to rise to 3% from October 2018
2. Other costs (setting up a pension scheme, getting the payroll software to help manage automatic enrolment , you own time in setting up the auto enrolment)
Contact us today for help and guidance into how you can plan for the impact of the new legislation. We can help you set up the best sustainable pension scheme for your company or give you the opportunity to take our pension service where we will reduce the stress and take care of all related matter on your behalf.
Adapted for latest changes