Despite the widespread television advertisements urging awareness of pension auto-enrolment (AE), a year or two still remains until it becomes compulsory for small and medium-sized firms. Nonetheless, such ads have focused talk on the importance of companies providing their personnel with workplace pensions. The question for many of those using London Registrars’ business consultancy service will be whether directors will be affected in addition to regular employees.

The rules require that is an employer must automatically enrol all of their “jobholders” in the NEST state-provided pension scheme, or an equivalent scheme provided by the employer and broadly offering the same benefits. However, some confusion may prevail as to whether the rules regard directors as jobholders.

A employee or worker counts as a jobholder if they normally work in the UK; are at least 22 years of age, but under state pension age; and earn at or above the income tax personal allowance over the applicable pay reference period – such as weekly or monthly. This allowance is presently £9,440 per year, rising to £10,000 from April 2015. Even individuals working for your company while meeting all of the aforementioned conditions do not count as jobholders if they are self-employed.

Clients of London Registrars’ business consultancy service should be aware that with dividends not counting as earnings, directors paying themselves a salary and taking their remaining income as dividends aren’t required to be auto-enrolled by their company. However, such directors will still come within the scope of AE if they decide in one year to pay themselves a bonus taking them above the income tax limit. Even here, however, there are exemptions.

For AE purposes, directors only count as jobholders if they are employed by their company under an employment contract and are not the sole worker. A director is still exempt from AE if they have a letter of engagement outlining the terms of their directorship, as this is not classed as a contract. Those who do come under the scope of AE are able to opt out, but are required to do so within 30 days. Those unsure whether they are affected by AE and who do not wish to be included are advised to opt out anyway to be certain.

The Pensions Regulator has recently indicated that office-holders – essentially non-executive directors and company secretaries – will also normally fall outside the scope of AE. Auto-enrolment will apply to them, however, if they also have a “contract of service” for all or part of their duties, given that this will make them an employee.

In summary, directors should know that they and their employees are equally affected by AE, but only where the director also has a service (employment) contract. Non-executive directors with a separate employment contract are also within AE’s scope. Opting out of AE is possible for those affected by it, but this has to be done no more than 30 days after the time it first applies.