Help Centre for Employers

How do I calculate pensionable earnings?

Employers make contributions to an employee’s pension fund based on a percentage of the employee’s earnings. The amount of pay that pension contributions are calculated on is called pensionable earnings.  Pensionable earnings can be calculated in different ways. Please check your Participation Agreement to see how you calculate your employees’ pensionable earnings.

The method of calculating pensionable earnings was selected by you when you signed up with NOW: Pensions. It’s important to understand what type of pensionable earnings you selected and what pay elements are included in the different types of pensionable earnings so that contributions can be calculated accurately.

There are a number of different ways to calculate contributions; the main methods are shown below:

1) Qualifying Earnings

Qualifying earnings are the band of earnings on which auto enrolment minimum contributions are based as specified by the government. Pension contributions are only paid on earnings between the Lower and Upper Earnings Thresholds for auto enrolment.

Qualifying earnings includes the undernoted pay elements:

– Basic salary or wages
– Commission
– Bonuses
– Overtime
– Statutory Sick Pay
– Statutory Maternity Pay
– Ordinary or Additional Statutory Paternity Pay
– Statutory Adoption Pay

For the 2018/19 tax year the earnings thresholds are between £6,032 and £46,350 a year. This means the first £6,032 of an employee’s earnings does not count for the purposes of auto enrolment.

So, if you choose our standard plan (101) for auto enrolment for a worker earning £20,000 a year, the amount we would calculate their pension contributions on would be only £13,968.  For an employee earning below £6,032 no contributions would be paid, and where an employee earns over £46,350 no contributions would be paid on any earnings above £46,350.

2) Basic earnings

Basic earnings are the earnings of the employee excluding any fluctuating income such as bonuses, commission, overtime etc.

The whole of the employee’s basic earnings are taken into account when calculating their contributions. So using our Plus plan (102) for auto enrolment for a worker earning £20,000 before overtime or bonuses, the amount we would calculate their pension contributions on would be the full £20,000.

3) Total Earnings

Total earnings mean all earnings are classed as pensionable and contributions will be calculated from the first pound earned.

For a worker earning basic pay of £20,000 plus an annual bonus of £5000, the amount we would calculate their pension contributions on would be the full £25,000.

Please note: you can choose to calculate contributions in a way that meets the requirements of three ‘sets’ described in the legislation. See The Pension Regulator’s guidance on certification of basic earnings.

Set

Auto enrolment in 5 easy steps - Step 1

A total minimum contribution of at least 9% of BASIC EARNINGS (at least 4% of which must be the employer’s contribution), or

Set

workplace-pensions-2

A total minimum contribution of at least 8% of BASIC EARNINGS (at least 3% of which must be the employer’s contribution), provided that the BASIC EARNINGS constitutes at least 85% of the TOTAL earnings (the ratio of BASIC EARNINGS pensionable pay to earnings can be calculated as an average at scheme level), or

Set

workplace-pensions-3

A total minimum contribution of at least 7% of TOTAL earnings (at least 3% of which must be the employer’s contribution) provided that all earnings are pensionable.

The contribution rate for schemes using certification is also being phased in. The rate will depend on which set of certification is being used. The rates for all three sets are set out below.

Set 1 phasing

Transitional period

Duration

Employer minimum contribution

Total minimum contribution

2

April 2018 to March 2019 3% 6%

3

From April 2019 onwards

4%

9%


Set 2 phasing

Transitional period

Duration

Employer minimum contribution

Total minimum contribution

2

April 2018 to March 2019

2%

5%

3

From April 2019 onwards

3%

8%


Set 3 phasing

Transitional period

Duration

Employer minimum contribution

Total minimum contribution

2

April 2018 to March 2019

2%

5%

3

From April 2019 onwards

3%

7%

Ultimately, employers can choose to pay pension contributions in any method you like providing it meets the equivalent auto enrolment minimums. The above pensionable earnings auto enrolment minimums rely upon a pay reference period.  This may not be appropriate for all employers.  Providing an employer meets the auto enrolment minimums they can make payments based on varying time periods such as an employer’s accounting year.

If you think you’ve made a mistake calculating contributions, contact The Pensions Regulator for guidance.

NOW: Pensions has a good technical infrastructure combined with a pension product suitable for our team. We couldn’t be happier with NOW: Pensions.
Martin Woods, SALT.agency