Every UK employer must auto-enrol eligible workers into a workplace pension scheme, contribute a minimum percentage of their qualifying earnings, and re-enrol every 3 years. Failure to comply triggers fines from The Pensions Regulator starting at £400. For most UK SMEs, the practical setup is: pick a scheme (NEST is the default), connect it to payroll, and let the system run.

Auto-enrolment is one of those UK employer obligations that's straightforward when set up properly and a mess when it isn't. The cost of getting it right is small. The cost of getting it wrong (including back-contributions plus fines) is significant.

Who must be auto-enrolled

Eligible workers must be auto-enrolled. The current eligibility:

• Aged 22 to State Pension age.
• Earns over £10,000 per year (or pro-rated weekly/monthly equivalent).
• Works in the UK (or ordinarily works in the UK).

Workers below the £10,000 earnings threshold but above the lower threshold of £6,240 (Lower Earnings Limit for NIC purposes) have the right to opt in. The employer must contribute if they opt in.

Workers below £6,240 have the right to join the scheme on a non-contributory basis.

What the contributions are

Minimum total contribution: 8% of qualifying earnings. Split:

• Employee contribution: 5% (taken from gross pay before tax).
• Employer contribution: 3% (paid by employer on top of gross pay).

Some schemes pay the employer contribution at 5% or higher as an attractive benefit. The 3% is the legal minimum.

Qualifying earnings are between the Lower Earnings Limit (£6,240 in 2024/25) and the Upper Earnings Limit (£50,270). So contributions are based on a band of earnings, not all earnings.

For a worker earning £30,000:

• Qualifying earnings = £30,000 - £6,240 = £23,760.
• Employee 5% = £1,188 per year, deducted from pay.
• Employer 3% = £713 per year, paid by employer.

The scheme to use

Three main routes for UK SMEs:

NEST (National Employment Savings Trust)

The government-backed default. Free to set up. Reasonable fees (currently 0.3% annual management charge plus 1.8% on each contribution).

Pros: free setup, easy connection to most payroll systems, no obligation to take any specific products, no minimum size. Cons: limited investment options, slightly higher fees than some commercial schemes.

For most UK SMEs starting out, NEST is the right choice. It works.

People's Pension

Commercial scheme. Lower contribution fee than NEST, but a flat £2.50 monthly fee per member.

Pros: usually cheaper than NEST for higher-earning workers, broader investment options. Cons: monthly fee can add up for low-earning or part-time workers.

Commercial occupational schemes

Aviva, Legal & General, Standard Life, Royal London, Smart Pension, etc.

Pros: better investment options, often dedicated account management at scale. Cons: setup fees, may have minimum employee count, sometimes minimum contribution levels.

For most SMEs under 30 employees, NEST or People's Pension is right. Above 30, commercial schemes become competitive.

Setting up

Step by step:

1. Get an Pensions Regulator letter (issued automatically when you register for PAYE).
2. Choose a scheme (NEST, People's Pension, commercial).
3. Set up the scheme. NEST takes 1-2 working days online; commercial schemes may take 1-3 weeks.
4. Connect to payroll. Most modern payroll software (Xero Payroll, BrightPay, Sage Payroll, FreeAgent) has direct integration with NEST and People's Pension. Other schemes may need file uploads.
5. Notify workers of their automatic enrolment. The letter explains: their right to opt out within 30 days, contribution levels, the scheme name.
6. Process contributions through monthly payroll.
7. Complete the Declaration of Compliance with The Pensions Regulator within 5 months of your "staging date" (the date you became obligated).
8. Triennial re-enrolment every 3 years from staging.

The 3-year re-enrolment cycle

Every 3 years, you must re-enrol any eligible workers who had previously opted out. This catches workers who opted out years ago but might want to be in now.

Re-enrolment process:

• Identify eligible workers who opted out.
• Re-enrol them in the scheme.
• Notify them they're enrolled and how to opt out again.
• Complete a Re-Declaration of Compliance with The Pensions Regulator within 5 months.

The 3-year date is fixed from your original staging date, not from individual employee opt-outs.

Opting out

Workers can opt out of auto-enrolment by giving written notice within 1 month of being enrolled. Their contributions are refunded; no further deductions.

After the 1-month window, workers can still stop contributions but they don't get a refund of past contributions. The employer must also enrol them again in 3 years at re-enrolment.

You cannot encourage workers to opt out. Doing so (inducement) is itself a regulatory breach.

Penalties

The Pensions Regulator enforces. Penalties include:

• Fixed penalty notice: £400 for breach of duty.
• Daily penalty: £50-£10,000 per day of continued non-compliance.
• Civil penalty: for serious breaches.
• Criminal prosecution: for deliberate or fraudulent non-compliance, with up to 2 years imprisonment.

Common breaches the Regulator pursues:

• Failure to enrol eligible workers.
• Failure to pay required contributions.
• Failure to complete the Declaration of Compliance.
• Inducement to opt out.
• Late or missed re-enrolment.

For most UK SMEs with proper payroll software, none of these happen accidentally. They happen because someone decided to delay or avoid the obligation.

Common SME mistakes

• Treating new hires inconsistently. Some get enrolled, some don't, depending on whether someone remembered.
• Forgetting re-enrolment. The 3-year cycle catches employers who set everything up correctly initially and then forgot.
• Not communicating opt-out rights. Workers must be told. Burying it in a 20-page handbook doesn't comply.
• Missing the Declaration of Compliance. Many SMEs don't realise this is a separate filing from setting up the scheme.

What to do if you're a new UK employer

If you're about to hire your first UK employee:

• Register for PAYE.
• Choose a pension scheme (NEST is the default).
• Connect it to payroll.
• Run the first auto-enrolment communications when the employee starts.
• Complete the Declaration of Compliance within 5 months.

If you're already employing but unclear on auto-enrolment status, run a quick audit:

• Are all eligible workers enrolled?
• Are contributions being made correctly?
• When is your next re-enrolment date?
• Is your Declaration of Compliance up to date?

Bottom line

Auto-enrolment is a routine compliance task with reasonable infrastructure. Get NEST set up, connect it to payroll, do the Declaration of Compliance, set a calendar reminder for re-enrolment. The system runs itself after that.