How Can Small Businesses Stay Compliant with Payroll Auto-Enrolment Rules?

Introduction

Auto-enrolment has transformed workplace pensions in the UK, ensuring that millions of employees now save for their retirement. However, for small businesses, meeting auto-enrolment obligations can feel daunting, especially if payroll is managed in-house.

The law requires every employer, no matter how small, to automatically enrol eligible staff into a workplace pension scheme and make regular contributions. Failing to comply can lead to fines from The Pensions Regulator (TPR). This article explains how small businesses can stay compliant with auto-enrolment rules, from setup to ongoing management.

What Is Auto-Enrolment?

Auto-enrolment is a government initiative introduced to help employees save for retirement. It requires employers to:

• Automatically enrol eligible employees into a workplace pension scheme

• Contribute to that pension each pay period

• Manage opt-outs, new joiners, and ongoing assessments

These rules apply even if you only employ one worker, such as a part-time assistant or family member.

Step 1: Know Who You Need to Enrol

Not all employees qualify for automatic enrolment. Eligibility depends on three factors:

• Age: Workers aged between 22 and the State Pension age

• Earnings: Those earning more than £10,000 a year (£833 a month or £192 a week)

• Workplace: The individual works in the UK

You must assess every employee each pay period because their eligibility can change if they get a pay rise, change hours, or reach the qualifying age.

Employees who are not eligible automatically can still opt in to the pension scheme if they want to save. You must allow this and make contributions on their behalf if they earn above a lower threshold.

Step 2: Choose a Pension Scheme

You must select a pension provider that meets legal standards for auto-enrolment. Many small businesses use:

• NEST (National Employment Savings Trust) a government-backed, low-cost scheme

• The People’s Pension or Smart Pension widely used by small employers

When choosing, consider:

• Setup and administration fees

• Integration with your payroll software

• The ease of handling employee contributions and opt-outs

Once your scheme is chosen, register with the provider and provide details of your business and employees.

Step 3: Set Up Auto-Enrolment in Payroll

Most modern payroll software includes auto-enrolment functionality. To stay compliant:

1. Enter each employee’s details accurately, including date of birth and salary.

2. Run payroll each period to assess which employees are eligible.

3. Automatically enrol qualifying staff and start pension deductions.

4. Send contribution details to your pension provider after each pay run.

Good payroll software will handle assessments automatically and produce letters for employees explaining their enrolment or opt-out options.

Step 4: Notify Employees

The law requires you to inform each employee in writing within six weeks of their auto-enrolment. Your communication must explain:

• Which pension scheme they are being enrolled in

• How much you and they will contribute

• Their right to opt out or make extra contributions

Most payroll systems generate these letters automatically, but you can also use templates provided by your pension provider.

Step 5: Make the Correct Contributions

Employers and employees both contribute to workplace pensions. The minimum combined contribution is currently 8% of qualifying earnings, made up of:

• 5% from the employee (including tax relief)

• 3% from the employer

“Qualifying earnings” refers to income between £6,240 and £50,270 per year. You must pay your employer contributions by the date agreed with your pension provider, usually shortly after each payroll run.

Step 6: Manage Opt-Outs and Refunds

Employees can choose to opt out of the pension scheme within one month of being enrolled. You must:

• Stop their pension deductions immediately

• Refund any contributions already made

• Keep a record of the opt-out notice for compliance

You cannot encourage or pressure staff to opt out. Doing so is against the law and could lead to enforcement action from The Pensions Regulator.

Step 7: Complete Your Declaration of Compliance

Once you have set up your auto-enrolment scheme, you must submit a Declaration of Compliance to The Pensions Regulator within five months of your staging or duties start date.

This declaration confirms that you have:

• Enrolled eligible employees

• Set up a qualifying pension scheme

• Begun making contributions

Failing to submit the declaration can lead to a fine, even if you have completed the setup correctly.

Step 8: Keep Records and Re-Enrol Every Three Years

Auto-enrolment compliance does not end once the system is in place. You must:

• Keep records of pension contributions, opt-outs, and re-enrolment decisions for at least six years

• Re-enrol eligible employees who previously opted out every three years

• Submit a re-declaration of compliance to The Pensions Regulator after re-enrolment

Your payroll software can remind you of re-enrolment dates, but it is your responsibility to act on them.

Common Mistakes Small Businesses Make

• Missing the initial registration deadline

• Forgetting to assess new employees or those with pay changes

• Failing to pay contributions on time

• Not sending employee communications within six weeks

• Ignoring re-enrolment duties

These errors can result in fines, which start at £400 and increase daily for ongoing non-compliance.

How an Accountant Can Help

An accountant or payroll specialist can make auto-enrolment much easier to manage. They can:

• Set up your pension scheme and integrate it with payroll

• Ensure accurate employee assessments each pay period

• Handle communications and submissions to The Pensions Regulator

• Manage contributions and re-enrolment cycles

• Keep your records compliant with current legislation

Outsourcing payroll and pension management is often cost-effective for small businesses, freeing up time and ensuring compliance without the stress.

Example Scenario

Imagine a small café that employs six staff members. The owner uses payroll software but initially forgets to assess part-time employees for auto-enrolment. After three months, The Pensions Regulator sends a compliance notice.

With the help of an accountant, the café sets up NEST, enrols all eligible workers, and submits the declaration of compliance. The owner also sets reminders for future re-enrolments. By taking swift action, the business avoids penalties and remains fully compliant going forward.

Conclusion

Auto-enrolment compliance is a legal requirement for all UK employers, including small businesses. While the process can seem complex at first, using payroll software and professional advice makes it manageable.

By assessing employees correctly, making timely contributions, and completing declarations on time, small businesses can stay compliant and support their employees’ financial futures. An accountant or payroll expert can provide peace of mind, ensuring every stage of the process runs smoothly.