Since 2012, the government has been rolling out the compulsory auto-enrolment pension scheme, ensuring all employers provide a pension scheme for their employees. Today all companies are contributing to employee pensions, but has the recent doubling of pension contributions hit your company’s bottom line?
As of 6 April 2018, the compulsory employer contribution for auto-enrolment pensions has doubled, and it will continue to rise to a total minimum employer contribution of three per cent by April 2019.
|Employer’s minimum contribution||Employee Contribution (+tax relief)||Total Pension Contributions|
|Oct 2012 – Mar 2018||1%||0.8% (0.2%)||2%|
|Apr 2018 – Mar 2019||2%||2.4% (0.6%)||5%|
|Apr 2019 onwards||3%||4% (1%)||8%|
The increase in compulsory pension contributions is the latest strain to hit small business budgets. And whilst it could be considered a hardship for business owners, it is the latest move from the government to look to improve the future of millions of workers who will possibly not have the same opportunities as older generations.
And the figures don’t lie, many SMEs who’re suffering from the hardship of introducing a pension scheme who wouldn’t have otherwise, are now contributing to their employees future security. The Department of Work and Pensions has estimated that over £17 billion per annum will be going into employee pensions by 2019/20 as a result of the scheme.
(S)SMEs Hit Hardest
The smallest SMEs have undoubtedly been hit the hardest, those who waited until the deadline only began paying auto enrollment contributions in Feb 2018, and saw a doubling of that amount leave their bank accounts after only two short months.
The increase in the minimum wage means that the UK’s smallest SMEs could be in trouble, with a reported 21 per cent predicting that auto enrollment could put them out of business, and 36% claiming they may need to increase the cost of goods and services to stay afloat.
And if that wasn’t harsh enough for the humble British SME, Brexit uncertainty means there is more stress for small businesses to deal with over the next few years.
Light At The End Of The Tunnel
It’s not all bad news, though. The economy is doing relatively well considering the current economic climate and there’s every reason that UK SMEs could do well over the next few years. So we’ve put together a few ideas to help SMEs in crisis re-evaluate their business finances and prepare for future auto enrollment contribution increases.
1) Plan, Plan, Plan
If you don’t have a current business plan, or if you never wrote one up when you started, then this is a great place to start. Write up / renew your business plan, there are some handy templates here on the Small Business Pro website. As part of your business plan, lay out your 5 year financial forecast, don’t forget to allow for your increased auto enrollment payments from April 2019 onwards.
You should be able to quickly see where you could save or identify areas that you’re undercharging for.
2) Go Digital
As of April 2019, if your SME’s income is over the VAT threshold of £85,000 you’ll need to subscribe to a digital software solution to manage your business finances anyway. So why not start now. The digitised solutions do take a bit of time to implement, but once in place should be a time-saver compared to managing your finances, VAT and tax the old fashioned spreadsheet way. Get your digital updates in now ahead of the next auto enrollment increase and help your business run more smoothly, freeing up time and resource for other tasks.
3) Hire An Accountant
Often the smallest SMEs will have a senior staff member taking charge over the business finances. This is a problem for a few key reasons. Firstly, that person is unlikely to be a business finance expert, and may miss things a professional accountant wouldn’t, leading to late payment fees or even fines. Secondly, that person is probably highly skilled in an area that is not related to business finance. Calculate how much time that person spends on the business financial admin, then work out how much you’re technically losing by not having that person spend those hours working in their key skilled area. It may seem like having a staff member manage your business finances is a frugal approach to take, but more often than no the opposite is true. Thirdly, a good accountant will help you prepare for these key business changes, keep you up to date on legislation and be the first to tell you when a money saving opportunity arises. You should think of your accountant as a business guardian there to help you succeed.
4) Make Investments Work Smarter, Not Harder
Did you know the average cost of replacing an employee is £3,000! That money could be going to a recruitment agency, it could be going towards job ads online and it also takes into account the time a staff member(s) spends on sifting through CVs, interviewing, and training your new staff member, not to mention the time it takes a new employee to hit their stride.
Having a high turnover of staff is incredibly expensive, so the solution is to ensure your staff are happy. Look at improving your workplace culture, invest in your employees. This could be workplace improvements, benefits packages, additional pension contributions to encourage them to stay, etc… Have a think about how you could improve your workplace culture and reduce your staff turnover.
Maybe you should invest in marketing to increase your sales too? SMEs often shy away from marketing, or as with finances, have a team member pick up the marketing tasks when it’s not their main skilled area. Marketing your business in the right way can mean accelerated growth, so consider what you have in your budget and consult an expert on the best way to spend it.
Invest in the right assets, your employees are you most important asset, review your staff portfolio and consider what position(s) you may be lacking in that are holding you back from bringing in more sales. Review the tools you’re currently using, are they outdated, could you spend less and get more by switching, are there tools you’re paying for monthly and not even using?
Making small and considered changes to the way you invest your business’ money could make all the difference to its future.
Warr & Co Can Help
Warr & Co help thousands of SMEs achieve their growth targets every year. We help by taking the burden of business finances away from you letting you do what you do best. Our expert team of accountants have been working with SMEs for decades and stay abreast of regulation changes and business opportunities.
We can work out a service plan unique to your requirements or offer a package covering you for all eventualities for a small monthly fee.
We offer all SMEs a free no-obligation consultation with one of our company directors, who are all fully qualified and highly experienced accountants. So you have nothing to lose, why not fill in the form below and tell us about your SME business finance challenges?