A guide to pensions for business owners


By now, you will know that all businesses are obliged to auto-enrol and contribute to their employees’ pension schemes.

If you are starting your own business and unsure what you need to do in regards to staff pensions, have a read through this guide to pensions for business owners. 

The Law

Businesses are required to provide an automatic enrolment scheme to all qualifying employees. You must pay pension contributions for almost all staff unless employees specifically opt-out. 

Companies failing to comply with the rules can face tough penalties – daily charges can be up to £10,000. 

Employers who deliberately fail to meet their obligations can face criminal prosecution and even imprisonment. 

What is a qualifying employee? 

A qualifying employee is a worker aged between 22 and state pension age, whose salary is over the automatic enrolment earnings trigger of £10,000, and who is not already a member of a qualifying pension scheme. 

Can non-qualifying employees opt-in? 

Non-eligible workers aged between 16 and 74 earning at least £6,032 have the right to opt into the pension scheme. 

Employees earning less than £6,032 have the right to join a pension scheme but the employer does not have to pay pension contributions. 

Can employees opt out of the pension scheme? 

Eligible workers may choose to opt-out, but must make a positive decision to do so. Those who do opt-out will be automatically re-enrolled after a given time. Workers may opt back in, but employers will not be required to accept opt-ins more than once every 12 months. 

What is the minimum level of contributions? 

The minimum contribution is payable on earnings between £6,032 and £46,350. Employer contributions must pay at least 3% of qualifying earnings. 

Total contributions (including employee contributions) must be at least 8%. So, if the employer pays 3%, the employee must pay at least 5%. 

Employers and employees can choose to make higher contributions than the minimum required. 

Do contributions qualify for tax relief? 

Employer contributions are treated as a business expense. 

Employee contributions benefit from income tax relief on contributions up to 100% of annual earnings subject to an annual allowance which is normally £40,000. 

The annual allowance is reduced by £1 for each £2 of income between £150,000 and £210,000. The minimum allowance is £10,000. 

Types of pension schemes 

There are three types of pension schemes: Defined benefit schemes (DB), Defined contribution schemes (DC), and Hybrid/Risk Sharing schemes. 

Defined benefit schemes (DB or final salary schemes) 

  • Places the responsibility for funding pensions on the employer. 
  • Promises a pension related to earnings at retirement. 
  • Schemes are revalued to ensure they still have enough assets to pay pensions far into the future. 
  • Factors such as stock market performance can affect asset values 
  • DB schemes have declined in the UK due to market volatility, increasing life expectancy and escalating costs  

Defined contribution schemes (DC or money-purchase schemes) 

  • Places the risk of underfunding on the employee. 
  • Employees are usually expected to select their own investment strategy for the scheme. 
  • Most schemes offer a default which most employees invest in. 
  • At retirement, the pension fund can be used to provide a lump sum and/or income 
  • The size of the pension fund depends on how investments have performed. 

Hybrids/Risk Sharing Schemes 

  • Neither pure DB nor pure DC and allow for risk-sharing between employer and employee. 
  • Hybrid schemes include career-average plans and cash balance plans. 
  • Seen as a compromise between DB and DC 

The benefits of providing a pension to employees 

Providing a competitive company pension can help to retain existing employees. It can also improve your business reputation as an employer and help to attract new employees. 

You can choose to offer other benefits as part of the scheme eg death-in-service benefits, or ill-health retirement pensions. 

By increasing your contribution to 4% and employee contributions to 6%, after 20 years an employee’s pension fund could be almost 50% larger. 

If you have any questions about pension schemes, including setting one up for your company, feel free to get in touch with us here at Magpie Accountancy. 

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