Every UK employer has duties under auto-enrolment from the moment they take on their first member of staff. There’s no small-business exemption, no grace period for being new to this, and The Pensions Regulator doesn’t treat a two-person business differently from a two-hundred-person one. The good news is that once you understand the mechanics, most of the actual work can be handled by decent payroll software — but you need to understand what’s happening to know whether your software is actually doing it correctly.
Who has to be enrolled, and who can opt in
The earnings trigger for auto-enrolment is £10,000 a year, frozen at that level for several years running, including into 2026/27. Anyone earning above that, aged between 22 and state pension age, working in the UK under a contract of employment, must be automatically enrolled. This isn’t a judgment call — meet the criteria and they’re enrolled.
Staff who don’t meet the criteria can still ask to join. Anyone earning between £6,240 and £10,000 a year can opt in, and you have to let them, with a mandatory employer contribution attached. Anyone earning below £6,240, or outside the 22-to-state-pension-age band, can also ask to join, though the mandatory employer contribution doesn’t always apply in the same way.
Separately from who qualifies, contributions themselves are calculated on the qualifying earnings band — currently £6,240 to £50,270 a year. You’re contributing on earnings within that band, not on someone’s whole salary.
What does auto-enrollment cost?
The minimum total contribution is 8% of qualifying earnings: at least 3% from the employer, the rest from the employee (typically 5%, with some of that coming back as tax relief depending on the scheme). You can pay more than the employer minimum if you choose to. You can’t pay less.
Take an employee earning £25,000 a year. Their qualifying earnings are £25,000 minus £6,240, which is £18,760. Eight percent of that is £1,500.80 a year in total minimum contributions — at least £562.80 of it from you, the rest from them.
Some small businesses choose to cover the full 8% themselves, so the employee contributes nothing. It costs more, but it removes a friction point — no pension deduction showing up on a payslip that might otherwise put someone off, and a genuine recruitment advantage if you’re competing for staff against businesses only paying the legal minimum.
How it works in practice
You need a pension scheme first. Most small businesses use NEST, the government-backed scheme built specifically to make this accessible without employers having to shop around commercial providers. Smart Pension and The People’s Pension are common alternatives, and which one suits you comes down to cost structure and how much administrative support you want. NEST is free to set up and has no minimum employer size, which is why it’s the default for most small businesses.
From there, every pay run requires assessing each employee — checking whether their earnings that period mean they now qualify, still qualify, or have dropped below the threshold. This isn’t a one-off check at the start of employment. It happens every time you run payroll, because circumstances change — a part-time worker who picks up extra hours one month might cross the threshold that month specifically and need assessing then, even if they weren’t near it the month before.
When someone qualifies, you set up their enrolment with your pension provider and send a formal communication explaining what’s happened, their right to opt out, and the contribution detail. Most payroll software automates the assessment and generates these communications, but you’re still responsible for making sure it’s actually happened.
Employees can opt out, generally within a month of being enrolled, with any contributions already taken refunded. After that window, leaving is treated as opting out going forward rather than a refund. You’re not allowed to encourage anyone to opt out yourself, but you do need a process ready for when an opt-out request comes in.
Even after someone opts out, you have a legal duty to automatically re-enrol eligible staff roughly every three years, on a date you choose within a window set by The Pensions Regulator. They can opt out again. You still have to go through the motion.
And within five months of your duties starting, you need to complete a declaration of compliance with The Pensions Regulator confirming you’ve met your obligations. One-off at the relevant trigger point, not an ongoing task — but missing it is a genuinely common source of penalties for new small employers who didn’t realise it was required.
What to watch out for
Assuming size is a defence is the most basic mistake — it applies from employee number one, and a sole trader hiring their first member of staff carries exactly the same duties as a fifty-person company.
Missing the declaration of compliance is, by most accounts, the single most common new-employer error. You can do everything else right — enrol staff, take contributions correctly — and still be in breach because nobody actually filed the declaration.
Not reassessing variable-hours staff regularly catches businesses with part-time or casual workers. A month where someone’s pay crosses £833 (the monthly equivalent of the £10,000 threshold) triggers an assessment that month, even if they were below it the month before. Software that only checks at the start of employment will miss this entirely.
And treating an opt-out as the end of the story is how the three-year re-enrolment duty catches people off guard — it happens long after the initial setup is finished and forgotten about.
How software can help
This is genuinely one of the better-automated corners of UK payroll compliance. Decent payroll software — several free tools included — assesses eligibility on every pay run, generates the required communications, calculates contributions correctly, and submits contribution files to your pension provider without manual intervention.
What varies is the quality of that automation. Some free and budget tools handle the basic assessment but need more manual steps for the pension provider integration. Others — Moneysoft and Primo Payroll are particularly well-regarded here — handle the whole chain from assessment through to provider submission with minimal hands-on involvement.
If auto-enrolment is the part of payroll you find most intimidating, weight this feature heavily when choosing software rather than assuming every tool handles it the same way. The quality of implementation varies more than you’d expect.
For the full comparison of how different payroll tools handle auto-enrolment alongside everything else, see our guide to the best payroll software for UK small businesses. If budget is tight, several free payroll options include solid auto-enrolment handling at no cost.
