How auto-enrolment will affect more SMEs than previously thought

Thousands more small companies than previously thought will need to sort their finances ahead of auto-enrolment, according to new data from The Pensions Regulator.

Their study suggests that half a million SMEs could struggle to budget for the requirements, as they will face higher employment bills as a result of setting up pension plans for staff.

It was previously estimated that 1.3 million small and micro employers would need to meet pension requirements during the next three years, but that figure has now risen to 1.8 million.

The new regulations mean an employer must contribute at least 1% of eligible employees’ qualifying earnings into pension schemes.

This figure rises to 2% in October 2017, and increases further to 3% in October 2018, meaning a considerable portion of funds will be needed to meet the legal requirements.

These contributions can be offset against business profits for tax purposes and are not subjected to National Insurance.

Failing to meet staging dates for auto-enrolment means firms could also face a financial backlash, so it is important to plan in advance.

Fixed penalty fines for non-compliance range from between £50 and £2,500 a day meaning firms could face severe issues if they fail to meet their duties as an employer.

Contributions also have pay reference dates, providing a useful way for firms to manage their finances to ensure that contributions can be paid on time and budgeted for accordingly.

Staff-related expenditure can represent 85% of the average employer’s costs according to The Pensions Regulator, so it can influence available finances greatly.

Many firms should be able to cope with the new requirements, but those with tight cash flows could face difficulty.

The key for firms is to think about all of the costs involved, as other aspects such as the need for additional payroll, technology or even administrative expenses could be forgotten.

These costs will be required throughout the running of the scheme and small firms that fail to recognise this could potentially require assistance from insolvency practitioners or other financial guidance.

However, planning in advance could help to reduce costs in the long-term, so businesses could really benefit from thinking ahead.

By Phil Smith

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