A number of Contractors have questioned how the new National Employment Savings Trust (NEST) scheme will affect them. From October 2012 the Government will introduce a new pension scheme to the UK as part of a larger overall attempt to reform pensions strategy. NEST was announced on 7th January last year, and was previously known as the “personal accounts” scheme.

The Government estimates that about 7million people are currently failing to adequately save for retirement, and a cornerstone of the planned reform is making it easier for these people to save for their retirement. The proposals will have wide ranging effects across every field of UK business. The onus will be put on employers to encourage their employees to save more. From October 2012 UK employers will have to automatically enroll employees into a qualifying workplace pension scheme. This auto enrolment can be to an existing company pension scheme (if it meets the Government’s criteria). If the employer does not operate a company pension scheme (or their scheme does not meet the criteria) then any employees will be enrolled into NEST, a simple, low-cost pension scheme.

Between October 2012 and 2017 all UK employers will be required to contribute a minimum of 3% of each employee’s eligible earnings into a pension, depending on the size of company. Employees will have the right to opt out of the scheme, however it is hoped the automatic opt-in with encourage more people to save. Employees will pay a personal contribution of 4% (with a further 1% tax relief being added) to make the minimum contribution 8%. Compulsory employer and employee contributions will also be phased in during this period.

The requirements

Some time between 2012 and 2016, depending on the type of scheme and size of business, UK employers will have to automatically enrol all eligible employees into a qualifying pension scheme (either the company’s scheme or a NEST scheme) and make contributions to their plan.

Employees who will be enrolled automatically are those:

  • Who aren’t already active members of a qualifying scheme
  • Are aged between 22 years and the State Pension age
  • Earn over £7,475 gross a year

Will this affect contractors?

At the moment there will be no change, however there are bound to be future developments. The majority of contractors operate through a limited company. There is usually one shareholder and one employee (the same person), occasionally two of each if spouse’s both work through their Limited company. Very few contractors take on employees – most preferring to sub-contract – so clearly the legislation is not really aimed at this market.

There is still a lot of work to be done on the scheme, most of it geared towards large employers, where the target recipients of the scheme work. At the moment, the regulations for small businesses, such as contractors and sole traders, have not been finalised. There has been no comment about the rules if you are an employer and an employee.

If the Government decided on compulsory registration, contractors always have the choice to opt out of NEST. Many contractors would be looking to make larger contributions to the scheme than NEST would allow, and will want a wider investment choice. The introduction of the scheme could be a good instigator for many contractors to put in place plans for retirement. When legislation is finalised for smaller businesses, the Pensions Regulator will write to every company individually, outlining their responsibilities.

Photo by RachelCC