How small businesses can soften the pensions blow

published 20 March 2019

938_MW_P25_SB — Small businesses face a painful squeeze

On 6 April, the minimum amount that employers must pay into the accounts of staff enrolled in their occupational pension scheme climbs from 2% to 3% of salary. That will increase some companies' costs by 50% overnight. With a 4.9% rise in the minimum wage coming into effect at the same time, many small businesses are facing a painful squeeze.

With employees' minimum contributions due to increase next month too, from 3% to 5%, it's possible more workers will opt out of company pensions, reducing the overall bill for their employers. However, employers are forbidden from encouraging their staff to opt out, with severe penalties, including prison sentences, for those who break the rules.

Instead, focus on other ways to keep costs down. For example, relatively few small businesses currently operate "salary-sacrifice" schemes. These are a perfectly legal way to offer staff access to the company pension scheme, but potentially reduce the cost of national insurance contributions for employers and employees alike. Effectively, workers accept lower pay on the understanding the reduction is paid into their pension scheme this reduces the wages on which national insurance is due rather than paying pension contributions out of their income. They're no worse off as a result.

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Another potential money-saving device is to shop around for a new pension-scheme provider. In the rush to comply with auto-enrolment, many small businesses signed up with the first provider they could find. They could now save large sums by reviewing pension arrangements and seeking a deal offering better value.

Be open with employees

Equally, make sure employees understand the extra value they will be receiving from your contributions to their pension, particularly if you're limiting their pay rises. Keep them updated on how much they're saving and what you're putting in on their behalf, including pointing out next month's increase. And ensure they know how their pension is performing so they appreciate the contribution you're making towards their retirement planning.

Turn to PayPal

PayPal has now advanced more than £1bn to small businesses in the UK since launching its "Working Capital" service five years ago, it says. While traditional bank lending to small businesses was flat last year, the internet-payments specialist increased its advances by 60%.

PayPal deliberately avoids the term lending, but Working Capital undoubtedly serves as an alternative source of finance for businesses that would traditionally have used a bank overdraft or loan.

The service is builton the back of the data PayPal has been able to compile on businesses that use it to take customer payments, which gives it a very detailed understanding of a company's sales and cash flows.

Assuming this data suggests the business is a good risk, PayPal offerscash advances of up to £100,000 against its future sales. The business then selects a percentage of its future PayPal takings it will commit to repaying this advance for as long as the debt remains outstanding.

It's a smart idea with clear advantages. Not least, PayPal's data enables it to make lending decisions in a matter of minutes. Also, repayments are flexible since you hand over a percentage of sales, rather than a fixed cash sum, you have less to repay in tougher months for the business but repay more in better times.

Still, there is a cost. PayPal charges a fixed cash fee, which is added to the advance. This fee varies according to how much the business borrows, what percentage of sales it elects to pay PayPal each month, and an assessment of its PayPal account history.

The payment processor doesn't publish details of its fees because it says they're bespoke, so comparisons with other types of lending are difficult. Would-be borrowers will therefore need to do their sums before accepting PayPal's terms to ensure they're getting the best possible deal.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.