Auto-Enrolment If You Employ Someone — Your Obligations

Taking on your first employee is a big step for any sole trader. Suddenly you're not just running a business — you're responsible for someone else's livelihood. And along with payroll, contracts, and employer's National Insurance, there's another obligation that catches many small business owners off guard: auto-enrolment.

Auto-enrolment means you must set up a workplace pension scheme and make contributions for eligible employees. It doesn't matter if you only have one member of staff. The rules apply to every employer in the UK, from multinational corporations to sole traders with a single part-time hire.

Let's walk through exactly what you need to do, when you need to do it, and what happens if you get it wrong.

What Is Auto-Enrolment?

Auto-enrolment is a government initiative that requires employers to automatically enrol eligible workers into a qualifying workplace pension scheme and make minimum contributions. It was rolled out between 2012 and 2018, starting with the largest employers and eventually covering every business in the country.

The idea is simple: rather than relying on people to opt into a pension voluntarily, the default is that they're enrolled unless they actively choose to opt out. Behavioural economics in action — and it's been remarkably effective. Millions more people are now saving for retirement who wouldn't have been otherwise.

As an employer, you have legal duties from the very first day someone starts working for you. These duties are enforced by The Pensions Regulator (TPR), and non-compliance can result in fines.

Who Needs to Be Enrolled?

Not every worker needs to be auto-enrolled, but you need to assess every one of them. Workers fall into three categories:

Eligible jobholders

These are workers who:

• Are aged between 22 and State Pension age
• Earn more than £10,000 a year (or the equivalent over a shorter period)
• Work in the UK

Eligible jobholders must be auto-enrolled. You don't have a choice about this — it's a legal requirement.

Non-eligible jobholders

These are workers who:

• Are aged between 16 and 74
• Earn between £6,240 and £10,000 a year

They don't have to be auto-enrolled, but they have the right to opt in. If they ask to join, you must enrol them and make employer contributions.

Entitled workers

These are workers who:

• Are aged between 16 and 74
• Earn less than £6,240 a year

They can ask to join your pension scheme, but you're not required to make employer contributions for them.

The key point: you need to assess every worker's status from their start date. Even if someone doesn't meet the eligible jobholder criteria, you still have duties towards them.

What Are the Minimum Contributions?

The minimum contributions for auto-enrolment are calculated on "qualifying earnings" — the portion of an employee's pay between the lower and upper earnings thresholds.

For 2025/26, these thresholds are:

• Lower earnings threshold: £6,240 per year
• Upper earnings threshold: £50,270 per year

The minimum total contribution is 8% of qualifying earnings, split as follows:

• Employer minimum: 3%
• Employee minimum: 5% (which includes tax relief)

So if an employee earns £25,000 a year, their qualifying earnings are £25,000 minus £6,240 = £18,760. The minimum employer contribution would be 3% of £18,760 = £562.80 per year.

You can, of course, contribute more than the minimum. Some employers use this as a recruitment and retention tool — offering enhanced pension contributions to attract better candidates.

How to Set Up a Workplace Pension

Here's what you need to do, step by step:

1. Choose a pension scheme

You need a qualifying workplace pension scheme. Popular options for small employers include:

• NEST (National Employment Savings Trust) — a government-backed scheme specifically designed for auto-enrolment. It accepts all employers regardless of size.
• The People's Pension — another large, low-cost option.
• NOW: Pensions — similar to the above.

These schemes are designed to be straightforward for small businesses. Costs are typically low, and setup is relatively painless.

2. Assess your workers

From each worker's start date, assess which category they fall into (eligible jobholder, non-eligible jobholder, or entitled worker). This determines your duties.

3. Enrol eligible workers

You must enrol eligible jobholders within six weeks of their start date (or your duties start date, if earlier). In practice, most employers enrol workers from day one.

You'll need to provide your pension scheme with the worker's details and set up contributions through your payroll.

4. Write to your workers

You must give each worker a letter explaining:

• That they've been enrolled (or their right to opt in/join)
• The name of the pension scheme
• How much you and they will contribute
• Their right to opt out

This is a legal requirement, not just good practice.

5. Make contributions on time

Contributions must be paid to the pension scheme by the 22nd of the month following the month they were deducted (or the 19th if paying by cheque). Late payments can trigger enforcement action.

6. Complete your Declaration of Compliance

Within five months of your duties start date, you must complete a Declaration of Compliance with The Pensions Regulator. This confirms you've met your auto-enrolment obligations.

What If an Employee Opts Out?

Workers have the right to opt out within one month of being enrolled. If they do:

• You must refund any contributions they've made.
• You stop making employer contributions for them.
• You must re-enrol them roughly every three years (on your re-enrolment date).

You must not encourage or incentivise anyone to opt out. Doing so is a criminal offence. You can explain the opt-out process if asked, but you mustn't suggest they should use it.

Record-Keeping Requirements

You must keep records of:

• The names and addresses of all workers enrolled
• Contributions paid (both employer and employee)
• Opt-out notices received
• Your pension scheme details
• Dates of enrolment and re-enrolment

These records must be kept for six years (or four years for opt-out records). If The Pensions Regulator asks to see them, you need to produce them.

Using Accounted to manage your bookkeeping means you'll already have a clear record of payroll costs, including pension contributions. That makes compliance much easier if you're ever audited.

What Happens If You Don't Comply?

The Pensions Regulator has real teeth. Penalties for non-compliance include:

• Fixed penalty notices: £400 for failing to meet your duties.
• Escalating penalty notices: Daily fines ranging from £50 (for 1-4 workers) to £10,000 (for 500+ workers) until you comply.
• Criminal prosecution: In serious cases, such as wilful non-compliance or inducing opt-outs.

These penalties can mount up quickly. A sole trader with one employee who ignores their duties for a few months could easily rack up thousands in fines — far more than the pension contributions would have cost.

Auto-Enrolment and Your Own Pension

Here's an important distinction: auto-enrolment applies to your employees, not to you as the business owner. If you're a sole trader, you're not employed by your own business, so you can't auto-enrol yourself.

Your own retirement saving needs to happen through a personal pension, such as a SIPP. This is a separate arrangement from your workplace pension scheme. Many sole traders find it helpful to manage both — the workplace scheme for their staff and a personal pension for themselves — and Penny within Accounted can help you track contributions to both.

If you're wondering how much to save personally, that's a separate calculation worth doing alongside your employer duties.

Practical Tips for Small Employers

1. Don't leave it until the last minute. Setting up a pension scheme takes time. Start the process as soon as you know you're hiring.
2. Use your payroll software. Most modern payroll systems (or your accountant's software) can handle auto-enrolment calculations automatically.
3. Budget for employer contributions. The 3% minimum is a real cost to your business. Factor it into your hiring decision from the start.
4. Keep communication clear. Your employees may have questions about the pension. Direct them to their pension provider's website for scheme-specific queries.
5. Set diary reminders. The Declaration of Compliance deadline and re-enrolment dates are easy to forget. Put them in your calendar.

Related Reading

• Drawdown vs Annuity — Retirement Options Explained Simply

• Can I Use My Pension to Buy Business Premises?

• The Tapered Annual Allowance — Does It Affect You?

• How Much Pension Should a Self-Employed Person Save?

• SIPP vs NEST for the Self-Employed

• National Insurance for Sole Traders — What You Need to Know

Try Accounted free for 30 days — no credit card required.

---

Accounted helps UK sole traders stay on top of their bookkeeping and tax. Start your free 30-day trial at getaccounted.co.uk

Accounted tracks pension contributions and calculates tax relief automatically. See pension tracking →