September 15, 2023
What Are Pensionable Earnings in the UK? + How to Calculate
Learn about pensionable earnings and how to calculate them to determine pension contributions in the UK.
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Employee pensionable earnings play a significant role in workplace pension schemes in the UK.
For instance, how much an employer contributes to an employee’s pension fund directly depends on how they calculate their pensionable earnings.
Let’s discuss more about pensionable earnings, why they’re essential, and how to calculate them accurately.
Pensionable earnings are the portion of an employee’s earnings that employers use to determine both parties’ pension contributions. It’s also known as an employee’s pensionable salary.
How do you work out the contribution?
For both the employer and the employee, the contribution is a certain percentage of the pensionable earnings.
You can calculate pensionable earnings in two ways based on your workplace pension scheme (we’ll discuss this in the next section).
Regardless of the method, you must meet certain minimum contribution conditions. In other words, you must contribute a certain minimum percentage of the pensionable earnings.
The minimum contribution amount can vary based on whether the pension scheme is a qualifying plan or not.
What’s a qualifying pension scheme?
A qualifying pension scheme, with respect to auto-enrolment, is a tax-registered scheme that explicitly meets the quality standards set by the UK government, such as:
It must meet the minimum contribution requirements.
The employer must contribute to the scheme.
As of August 2023, the minimum contribution amount for qualifying auto-enrolment pension schemes is 8% of the employee’s pensionable earnings — where employers contribute 3%, and employees pay the remaining 5%.
If your workplace pension scheme doesn’t meet the quality standards explicitly, you’ll need to self-certify that your scheme is a qualifying one (more on this in the FAQ section).
In such cases, the minimum contribution rates could differ from the 8% limit for qualifying schemes.
Similarly, some occupational pension plans, like the NHS pension scheme, have several member contribution tiers based on employee pensionable pay.
There’s no upper cap on employer pension contributions in the UK. An employer may choose to contribute more than the minimum legal contribution to boost employee satisfaction. Sometimes, depending on the scheme, they may be obliged to contribute more than the required minimum.
You can calculate pensionable earnings through:
The qualifying earnings or banded earnings method
The pensionable pay or unbanded earnings method
Let’s discuss each in detail.
This method is usually the default approach if you run a qualifying pension scheme that explicitly meets all the quality requirements set out by the government.
These are the employee earnings — before any Income Tax and National Insurance contributions are deducted — that fall within a salary range set by the UK government.
The qualifying earnings limits for the tax year 2023-24 are as follows:
The lower earnings limit: £6,240 per year
The upper earnings limit: £50,270 per year
Here’s those earning thresholds broken down over some common pay periods:
What do qualifying earnings cover?
They include an employee’s:
Basic salary or wage
Other statutory payments like sick pay, paternity benefit, maternity pay, adoption pay, etc.
Variables like overtime, bonuses, and commission
Here’s how you can work out an employee’s pensionable earnings (and your contributions) on the qualifying earnings basis:
Step 1: Add up the employee’s basic salary, all the statutory benefits, and other variables we mentioned above.
Step 2: Exclude the lower earnings threshold (as per the pay period) from the total amount from Step 1.
Step 3: Ignore any earnings over the upper earnings threshold. This means the maximum qualifying earnings in a year are capped at £44,030 (£50,270 minus £6,240) in 2023.
Step 4: Calculate your contribution amount using this pensionable amount. Your minimum contribution would be 3%, while the employee contributes 5% of the pensionable amount.
Here’s an example:
Consider an employee earning a base annual salary of £50,000, a bonus of £4,500, and Holiday Pay amounting to £500.
The gross earning of the employee is £55,000 (£50,000 + £4,500 + £500). This amount exceeds the upper limit of £50,270 for the tax year 2023-24.
So ignore the amount above the upper limit, which leaves the pensionable amount to be £50,270. Then, deduct the lower threshold from this amount (£50,270 minus £6,240).
The final pensionable earnings = £44,030.
The employer’s minimum contributions must be 3% of £44,030 = £1320.9.
The employee’s minimum contribution is 5% of £44,030 = £2201.5.
They won’t be auto-enrolled into the workplace pension scheme.
But if they’re between 16 and 75 years old, they can still opt in for a company pension scheme and request employer contributions.
However, the employer is not obliged to contribute to their pension fund.
They won’t be auto-enroled into a pension scheme.
But if they’re between 16 and 75, they can opt-in and are even eligible for the minimum employer contribution for the pension scheme. The employer must oblige in this case.
The Department for Work and Pensions (DWP) reviews the qualifying earnings thresholds each year. They consider different factors when upgrading these limits, such as inflation, size of the workforce, and changes in average employee earnings.
Employers commonly use this method if they’ve self-certified their workplace pension scheme. You consider an employee’s salary and other earnings without applying the qualifying earnings' upper or lower limits.
When using this approach, the pensionable pay must be at least equal to ‘basic pay' over the certification period.
You can calculate pensionable pay in three ways:
Basic Pay Method
‘85% of Total Earnings’ Method
Total Earnings Method
Each method has different minimum contribution requirements.
Let’s look at how they work.
You base your pension contribution calculation on the employee’s basic salary or wage before deductions, plus any Holiday Pay. You may also include Statutory Sick Pay, maternity and paternity leave benefits, adoption pay, etc.
But, you omit any commission, bonuses, overtime, or other variable payments like relocation and travel allowance.
Minimum Contribution Rate:
Employer contribution: 4% of pensionable pay
Employee contribution: 5% of pensionable pay
Overall contribution: 9% of pensionable pay
You work out your contributions on the employee’s gross earnings (excluding overtime, bonus, and commissions), ensuring the final pensionable pay is at least 85% of the employee’s total earnings.
The employee’s total earnings will include all forms of payments from the employer, including salary, bonus, commissions, and other performance-related pay.
Minimum Contribution Rate:
Employer contribution: 3% of pensionable pay
Employee contribution: 5% of pensionable pay
Overall contribution: 8% of pensionable pay
In this method, you consider all elements of employee earnings, including their:
Statutory Sick Pay, Statutory Maternity Pay, ordinary or additional Statutory Paternity Pay and Statutory Adoption Pay
Other variable pay components, including commission, bonuses, and overtime
Minimum Contribution Rate:
Employer contribution: 3% of pensionable pay
Employee contribution: 4% of pensionable pay
Overall Contribution: 7% of pensionable pay
Let’s consider a scenario where an employee’s yearly earnings are as follows:
Basic salary = £30,000
Holiday Pay = £800
Overtime pay = £200
If you choose the basic pay method, the pensionable earnings will be basic salary plus Holiday Pay — £30,800.
The employer contribution is 4% of the £30,800 = £1232.
However, if you choose the total pay method, the pensionable earnings will be a total of all earnings — £31,000 (£30,000 + £800 + £200). In this case, the employer’s contribution is 3% of the pensionable earnings — £930.
The method you use for calculating pensionable earnings — i.e., basic pay, qualifying earnings, or total earnings — can be affected by several factors, such as:
Depending on the nature of the pension benefit scheme, the method of calculating pensionable income can vary.
For example, ‘qualifying earnings’ are commonly used for defined benefit schemes.
In contrast, employers typically opt for the basic pay method for self-certified defined contributions or money purchase schemes.
Moreover, each scheme may have specific rules that determine the calculation method.
For instance, a private pension provider may have different regulations than a public sector offering like the National Health Service or NHS pension scheme.
The pension calculation method can also depend on the type of employee earnings.
For example, consider an employee who frequently works overtime and receives commissions. You can prefer the total earnings basis over basic pay to ensure that the pension contributions are fair and proportionate to the employee’s gross income.
Or, if the employee’s earnings exceed the upper qualifying earnings threshold, you may opt for the pensionable pay method.
Similarly, you may also need to consider the total amount of pensionable earnings, especially to meet the minimum contribution requirements.
Some employers may have their own rules for calculating pensionable earnings, which may override the general rules.
However, they’ll have to ensure they meet the minimum contribution requirement for the scheme type.
Here’s why pensionable earnings must be calculated precisely:
It allows you to stay compliant with auto-enrolment regulations set by the Pensions Regulator in the UK. Failing to do so could attract penalties.
It helps determine your exact pension contributions in that tax year.
It ensures that your employees receive a fair amount of pension contributions.
It can help with tax planning in the short term. The tax relief you can claim on your contributions depends on how much you’re contributing. Any contribution above the annual allowance (£60,000) is taxable.
In the long term, it could help you with retirement planning, especially if you’re a member of a defined contribution plan — where the size of your pension pot depends on how much you contribute.
An employee must be between 22 and the State Pension age to qualify for auto-enrolment in workplace pensions. The employee must also earn a minimum of £10,000 per year. As of 2023, the State Pension age is 66 (expected to increase to 67 between 2026 and 2028).
Find out more about the UK State Pension in our detailed guide.
Setting up and managing a workplace pension plan is no easy task.
You’ll need to ensure legal compliance, oversee complex administrative processes, and balance your pension costs at the same time.
Thankfully, there’s a much simpler solution — say hello to Yonder!
Yonder is a retirement benefits platform that offers digital pension solutions for global teams.
It lets you set up a cost-effective workplace pension plan that complies with the UK’s auto-enrolment regulations. For this, we have partnered with Smart Pension – a trusted pension provider in the UK.
Here are some more reasons to choose Yonder:
Choose your contribution rates — ranging from the auto-enrolment minimum of 3% up to 6%, or even as high as 8%.
Track how your retirement benefits compete locally with geo-based data.
Automate auto-enrolment, postponement, and manage re-enrolments.
Set up your workplace pension and enrol your team in less than 5 minutes. (Get started right away!)
Scale your retirement benefits as your team grows without burdening yourself or your employees with complex paperwork.
Let’s tackle some other questions you may have about pensionable earnings.
Each employer will assess your eligibility for auto-enrolment based on your earnings with them. They’ll then calculate your pensionable pay based on your earnings with each job.
This means you can contribute to more than one workplace pension scheme.
In the UK, employers must self-certify their pension scheme if the scheme does not explicitly meet the quality standards set by the government.
The employer must certify that their scheme passes one of the three sets of alternative quality tests laid down by the UK government. These tests have different minimum contribution requirements — based on what you consider as an employee’s pensionable pay.
The three tests correspond to the three pensionable pay methods we discussed earlier: basic pay, 85% of total earnings, and total earnings.
Employers can use their own certificates or use a template provided by The Pension Regulator. A certificate is valid for 18 months, after which the employer must re-certify the scheme.
For further reading:
A salary sacrifice scheme is an employer-employee agreement where an employee gives up a portion of their salary in exchange for a higher employer pension contribution.
It’s a popular way employees in the UK boost their pension pots, in addition to regular pension contributions. Employees can even opt for non-cash benefits like childcare vouchers or a company car instead of pension contributions.
Salary sacrifice reduces the employee’s take-home pay.
With a lower gross salary, the employee pays less income tax and National Insurance (NI) contributions. It also reduces the employer’s NI contribution liability, which they can pass on to the employee’s pension pot.
As an employer, you must calculate pensionable earnings accurately to determine your contribution costs and ensure compliance with UK pension laws.
Use this guide to understand which calculation method applies to your company and how to proceed.
Another great way to simplify workplace pension management is to use Yonder. This employee benefits platform lets you enrol your UK employees in compliant pension schemes in just a few clicks.
So what are you waiting for?
Join Yonder to streamline your workplace pension offering!
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