What are pensionable earnings and how do I calculate them?

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 what pensionable earnings are and how you can calculate it.

What are pensionable earnings?

As a UK employer you must automatically enrol your employees in a workplace pension scheme if they are eligible.

Both employers and employees need to contribute at least the minimum amount, which is set at 5% of pay for employees (including tax relief), 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 for pensions?

Qualifying earnings are one method of calculating pensionable earnings. They are commonly used for defined benefit schemes and many defined contribution schemes.

For auto-enrolment purposes, qualifying earnings refer to the portion of an employee’s pay between £6,240 and £50,270.

How this method works is explained in the following section, along with the other two methods.

How do you calculate pensionable earnings?

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.

With this method, pensionable earnings = the employee’s basic salary before any bonuses, overtime, or commission.

2. Qualifying earnings

Qualifying earnings are a ‘slice’ of an employee’s salary, currently set at the band from £6,240 to £50,270 and including all forms of payment including bonuses.

This method is most commonly used for defined benefit pension schemes.

3. 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 and commission (£50,000) minus £6,240, which makes £43,760. So the employer contributes around £1,312, and the employee contributes £2,188.

Total earnings

The total earnings 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.

During auto-enrolment, you should explain to them which option you’re using – typically as part of the pension scheme brochure or documentation you send them.

This will enable them to understand exactly how much you’re contributing and 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.

You must auto-enrol eligible employees, although those who aren’t eligible for auto-enrolment 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 £50,270 upper limit. If, for example, an employee earns £60,000 annually, their qualifying earnings will be capped at £44,030 (£50,270 - £6,240).

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

FAQs on pensionable earnings

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

Get expert financial advice

Understanding how to calculate pensionable earnings is crucial for employers and employees to ensure accurate pension contributions and compliance with auto-enrolment requirements.

Using methods such as basic pay, qualifying earnings, or total earnings, you can determine the appropriate contributions based on different salary components.

It's essential to communicate the chosen method to employees and provide detailed information about their pension scheme.

Unbiased can quickly match you with a financial adviser for expert financial advice on optimising pension contributions and understanding the best pension schemes.