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What are pensionable earnings and how do I calculate them?

Updated 23 October 2020

3min read

Nick Green
Financial Journalist

Pensionable pay

As an employer, when you auto enrol your employees onto a workplace pension scheme, the UK government has set minimum levels of contributions that both you and your employees need to pay. So how is this minimum worked out? This depends on a figure known variously as ‘pensionable earnings’ or ‘pensionable pay’ – however, there are different ways that this figure can be worked out. Here we explain the ways in which you can do this.

What are pensionable earnings?

As a UK employer you must automatically enrol your employees onto a workplace pension scheme. Both employers and employees need to contribute at least the minimum amount, which is set at 5% of pay for employees, while employers must contribute at least 3%.

The question is, what counts as ‘pay’ for the purposes of this calculation? The figure used to work out this amounts is known as ‘pensionable earnings’ – as it won’t necessarily include everything the employee earns in that year (though it may do).

So the first task of an employer (or their accountant) is to work out the employee’s pensionable earnings. There are three main ways to do this, which we explain below.

What are qualifying earnings?

Qualifying earnings are one method of calculating pensionable earnings. They are commonly used for defined benefit schemes, but also for many defined contribution schemes. How this method works is explained in the following section, along with the other two methods.

How do I calculate pensionable pay?

Pensionable pay / earnings is generally calculated in one of the following ways:

  1.  Basic pay

Basic pay is the most common method of calculation for defined contribution pensions. In this method, pensionable earnings = the employee’s basic salary before any bonuses, overtime or commission.

  1.  Qualifying earnings

Qualifying earnings are a ‘slice’ of an employee’s salary, currently set at the band from £6,240 to £50,000 and including all forms of payment including bonuses etc. This method is most commonly used for defined benefit pension schemes.

  1.  Total earnings

Total earnings are quite simply all money earned in that employment, i.e. salary, bonuses, commission and so on. The only thing that does not count is any income from dividends.

So both your employer contribution, and the employee’s contribution, will be based on one of the above figures, depending on which method you use.

Examples of pensionable pay calculations

For example, if you are paying minimum contributions (3% employer, 5% employee) and the employee earns £30,000 salary and £20,000 commission, here is how you’d work it out under the different methods:

Basic pay

Basic pay is £30,000 so the employer contributes £900 and the employee contributes £1,500.

Qualifying earnings

Qualifying earnings are salary + commission (£50,000) minus £6,240, which makes £43,760. So the employer contributes £1,312 and the employee contributes £2,188.

Total earnings

Total earnings here are £50,000 so contributions are simply 3% and 5% of this respectively. So the employer contributes £1,500 and the employee contributes £2,500.

When auto-enrolling employees you’ll need to explain to them which option you’re using – typically as part of the pension scheme brochure or documentation you send to them. This will enable them to understand exactly how much you’re contributing, and also how much of their earnings will go into the pension.

You’ll also need to share information on the type of pension scheme, who runs it, how they can leave the scheme if they wish, and how tax relief applies to them.

What happens if employee earnings are below the threshold?

To be auto enrolled, an employee has to be aged between 22 and state pension age, and earn at least £10,000 a year. However, although you don’t have to auto-enrol them, they have the right to request access to a pension scheme. If they do, you’ll need to make arrangements for them to join. You’re not required to contribute in this scenario, but can choose to if you like.

How do I auto enrol employees if they are above the threshold?

If you are using the qualifying earning system, you can still auto-enrol employees if their qualifying earnings are above the threshold. You’ll just ignore any earnings over the £50,000 upper limit. If, for example, an employee earns £60,000 annually, their qualifying earnings will be capped at £43,760 (£50,000 - £6,240).

If you are using the total earnings system, there will be no upper limit to their pensionable earnings other than the employee’s annual pension allowance or lifetime allowance.

Other FAQs

Is overtime pensionable?

If you’re using total earnings or qualifying earnings, overtime is pensionable as part of their gross earnings. If you’re using basic pay, however, only their salary without overtime is pensionable.

Is holiday pay pensionable?

If you’re using total earnings or qualifying earnings, the below list of earnings are all pensionable, including holiday pay.

  • Basic salary
  • Overtime
  • Bonuses
  • Commission
  • Statutory sick pay, maternity or paternity leave
  • Adoption pay
  • Holiday pay

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.