Directors, limited liability partners and auto enrolment
Directors, LLP members and auto enrolment can be confusing. This guide explains when company directors count as ‘workers’ for auto enrolment, how the rules apply to limited liability partnerships (including salaried members), and what employers need to do in common scenarios.
Key facts
- Directors are only workers if they have a contract of employment.
- Sole directors are exempt from auto enrolment.
- Since 6 April 2016, an employer can decide whether to apply employer duties to directors.
Are one director companies exempt from auto-enrolment?
Are one director companies exempt from auto-enrolment?
The Pensions Act 2008 says that directors are not treated as workers unless they’re employed under a contract of employment to work for the company AND there is at least one other person employed by the company under a contract of employment.
In other words, a company with just one director and no other employees is exempt from auto enrolment. What this means in practice is that they don’t have to complete a declaration of compliance or set up a pension scheme.
Are multi-director companies exempt from auto-enrolment?
Are multi-director companies exempt from auto-enrolment?
Where there is more than one director in a company, each director should be looked at separately to determine worker status.
But regardless of the status of the directors, if the company takes on an employee in the future, chances are that the new employee will be a worker, and if any of the directors are employed under a contract of employment, they will be workers too.
Do office-holders need to be auto-enrolled?
Do office-holders need to be auto-enrolled?
Office-holders include non-executive directors, company secretaries, board members of statutory bodies and trustees. They normally won’t have a contract to work for the company concerned so normally won’t be treated as workers.
However, they might also have a contract for services for part of their duties, so could be treated as a worker in respect of that contract.
A word about contracts
A contract of employment can be written, verbal or even implied.
In the case of very small companies, for example where a married couple are both directors, it could be that there won’t be written contracts in place - but that doesn’t mean that they will not be treated as workers.
They will need to test themselves against the criteria like any other director.
If a director is a worker, do they need to be auto-enrolled?
If a director is a worker, do they need to be auto-enrolled?
Where a director is treated as a worker, all the employer duties apply.
In practical terms however, directors might only be receiving nominal PAYE income – for example at or just over the National Insurance threshold – with the bulk of earnings paid as dividends.
So, although the director might have to be assessed for auto enrolment, they might not have to be automatically enrolled. There will still be duties that must be performed, like having a scheme available and giving workers information, but where there are only one or two directors, this shouldn’t be too onerous.
Since 6 April 2016
The employer duty was turned into a discretionary power. In other words, the employer can decide to treat a director as if the employer duties applied but can equally decide not to apply them. If the employer duties are applied, all duties apply, not just the enrolment duties – for example, the information requirements and the director’s right to opt out. But of course, it may be that on assessing the director, the employer finds that they are not an eligible jobholder and so don’t have to auto enrol them (but the director would still have the right to opt in).
If the employer decides not to apply the employer duties, the director again has the right to opt in.
How are members of a Limited Liability Partnerships (LLPs) treated for auto-enrolment?
Is there anything different about how the auto-enrolment rules apply to Limited Liability Partnerships (LLPs)?
The rules apply as normal to the employees of the LLP. However, care needs to be taken when looking at the partners.
The partners could be either a traditional equity partner or a salaried partner, it is important to identify which type of partner they are as the rules apply differently/
Non-Salaried Members (Traditional Equity Partners)
These partners typically share in the profits of the LLP. They have significant influence over the business and are not paid a salary in the traditional sense.
They are not considered workers under the Pensions Act 2008, therefore, automatic enrolment duties do not apply to them.
Salaried Members (Partners)
These partners typically work under a contract for services. They receive a fixed or variable salary (not just profit share). They also have less influence over the affairs of the LLP than a traditional equity partner. If these conditions are met, automatic enrolment duties apply to them.
To assist the LLP to confirm whether a partner is salaried or non-salaried, HMRC have produce a technical note and guidance.
HMRC - Salaried Member Rules: Legislation day technical note and guidance
Disclaimer
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.