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The director exemptions from automatic enrolment explained
Some staff are exempt from the duties under automatic enrolment and do not need to be put into a pension scheme. In some cases, directors may be exempt, depending on whether they have an employment contract and who else is working for the organisation.
Only organisations that employ workers have duties under automatic enrolment.
If there are no staff or all staff are ineligible for automatic enrolment, then the organisation would not need to set up a pension scheme or complete a declaration of compliance.
In the case of directors who are classed as workers, the organisation can choose whether to put them in a pension scheme or not. If the organisation chooses not to, it has to complete a declaration of compliance saying that it has not put any workers into a scheme.
What is the definition of a director?
When referring to a director; we mean anyone holding office as a director. This does not include a person who is a director in name only.
In the case of a company; it means a director formally appointed under the Companies Act 2006, and also anyone acting as a director in the sense of having a decision-making role in the corporate governance of the company, even if they have not been properly appointed.
In the case of corporate bodies other than companies’, it means anyone holding an office of director created by the establishing legislation or Royal Charter.
When is a director regarded as a worker?
A director is only a worker for automatic enrolment purposes if:
they have a contract of employment with the organisation
at least one other person (who can be another director) also has a contract of employment with the organisation
A contract of employment does not have to be written down anywhere, it could also be either a verbal or implied contract.
However, if there is no written contract of employment, or other evidence of an intention to create an employer/worker relationship between the company and a director or directors, often the position can be not to argue that an implied contract of employment exists. You can find more information about employment contracts on the employment status section of the GOV.UK website or from you employment law specialist.
If an individual is a director of one company and works for another company as an ordinary member of staff, they will still be a worker as far as the second company is concerned, even if they are not a worker in respect of the first company because they are a director.
Director(s) without an employment contract
If a director does not have an employment contract, they cannot be a worker and are therefore always exempt from automatic enrolment. This means that an organisation with one or more directors who do not have contracts of employment is not an employer if it does not have any staff other than the director(s).
The company will have no automatic enrolment duties and does not need to complete a declaration of compliance. In this case they should let the Pension Regulator know that they're not an employer.
If the organisation does have other staff, it has duties in respect of those other staff and is an employer. If none of the other staff meet the age and earnings criteria for automatic enrolment, the company still has to complete a declaration of compliance.
If the company's circumstances change so that automatic enrolment duties apply; they’ll need to inform the Pension Regulator of this as soon as possible. For example if they took on a member of staff other than a director, or if at least two directors started working for them under contracts of employment.
Directors with an employment contract where there are no other members of staff
Even if a director does have a contract of employment, they are not classed as a worker if they are the only person in the company with an employment contract.
A one person company consisting of a single director is never considered an employer under automatic enrolment, whether the director has an employment contract or not.
This would be true even if there were other members of staff, such as other directors, as long as none of the other staff were working under employment contracts.
The director exemption from automatic enrolment only applies for the work they carry out for that company.
A one person company with a sole director will not need to complete a declaration of compliance and should tell the Pension Regulator that they're not an employer.
Where a company has multiple directors and no other staff - and at least two of the directors have employment contracts - all the directors with employment contracts will be workers and subject to the automatic enrolment duties - and all those directors without employment contracts will not be.
If the company's circumstances change so that automatic enrolment duties apply, they'll need to inform the Pension Regulator of this as soon as possible (for example if they took on another member of staff under a contract of employment).
Directors with an employment contract who are not the only members of staff
If a director has a contract of employment and is not the only person working for the company under an employment contract, they are not exempt.
Depending on their age and earnings, they may qualify for automatic enrolment and the company will have the option to put them into a pension.
If the company chooses not to automatically enrol a director who is or becomes eligible for automatic enrolment (see below), the director will retain the right to opt in or join a pension.
If such an organisation decides it does not wish to enrol any employed director who is eligible for automatic enrolment, and it has no other eligible staff, then it does not need to set up a pension scheme - but will need to make a declaration of compliance.
Organisations whose staff are all exempt
If the organisation has no workers, because all their staff are exempt, they will not need to complete a declaration of compliance.
If the organisation has received a letter from the Pension Regulator saying they have a staging date, then they should let them know they are not an employer by completing the online form.
Please note that if there are staff who simply do not meet the age and earnings criteria for automatic enrolment but the exemptions do not apply, they do have legal duties and will need to complete a declaration of compliance.
If the company's circumstances change so that automatic enrolment duties apply; they'll need to inform the Pension Regulator of this as soon as possible. For example if they took on a member of staff other than a director, or if at least two directors started working for them under contracts of employment.
The special rules for directors do not apply to other office-holders, such as trustees or company secretaries
These office-holders will be classed as workers and subject to the automatic enrolment duties if they have an employment contract with the organisation.
If they have no employment contract and only perform the duties of their office, they are not a worker and are exempt.
Where an office holder does have a contract of employment, it may not cover all of the work that they do for the company.
For example, a company secretary’s contract might cover additional administrative services that they provide to the company, but not their official duties as company secretary. In this situation, the office-holder is classed as a worker, but only their income under the employment contract is counted for automatic enrolment purposes.
There are no special rules for husband-and-wife companies, as the duties are not affected by any family relationships.
If the only people working for the company are a husband and wife and both are directors, they will both be workers if they both have contracts of employment with the company. If only one of them has an employment contract, or neither of them does, then neither of them will be workers and the company will not be an employer.
In the case of a company where one spouse is the director and the other holds the office of company secretary (please note this is not the same as simply performing general secretarial work, which would not be exempt), exemption from automatic enrolment will depend on whether contracts of employment are held by each spouse.
A number of different circumstances might apply, for example:
if either (or both) the husband or wife is a director of the company and does not have a contract of employment, then they would be exempt
if either the husband or wife does hold a contract of employment and is not a director, they would not be exempt (depending on their age and earnings they may qualify for automatic enrolment and need to be put into a pension)
if either the husband or wife holds a contract of employment, but that person is a director, then that person is exempt (see above)
if both the husband and wife hold contracts of employment, neither are exempt and the company will have duties for both of them, even for a spouse who is a director (although the company can choose not to automatically enrol a director - see below)
if the husband or wife who holds a recognised office such as company secretary, does not have a contract of employment - and only performs the official duties of that office (such as submitting the annual return to Companies House) - they are exempt from automatic enrolment
if the husband or wife who is company secretary has a contract of employment, they would not be exempt even if the contract only applies to additional work that they do over and above their official responsibilities
When you can choose whether or not to automatically enrol someone
There are some cases where an employer can decide whether or not to put someone in a pension scheme, if the member of staff has triggered automatic enrolment or re-enrolment, including people who:
are directors who are working under an employment contract, where there is at least one other worker working for the organisation under an employment contract
are in their notice period
have ceased active membership of a pension which is approved for use with automatic enrolment within the previous 12 months
are partners of limited liability partnership (LLP) companies, but are not salaried members under HMRC tax rules
have HMRC tax protected status
Whether or not they choose to automatically enrol any of these workers, the employer will need to communicate to them - and they will still need to make a declaration of compliance. However, these individuals do have the right to opt in or join a pension scheme at any time and, if they do so, the employer cannot refuse to enrol them (except in the case where the employer has chosen to exclude people in their notice period, as these people lose the right to opt in or join).
For further help you can contact Mark Cardy at Skerritts on 01273 20499 or email@example.com
The content of this document is for information only and does not constitute advice and should not be construed as such. Professional advice should be sought.
The value of investments can fall as well as rise and past performance is not a guide to the future. This information contained within this document is for guidance only and is not a recommendation of any investment or a financial promotion.