UK employers can automatically enrol their employees in a workplace pension scheme. The minimum contribution you as an employee should make is 5%, whereas your employers must contribute at least 3%.
| What is pension qualifying earnings? | Earnings used to calculate an individual’s pension contributions |
| What minimum amount must an employer contribute to a workplace pension? | 3% |
| What minimum amount must an employee contribute to a workplace pension? | 5% |
| What are the methods of calculating pensionable earnings? | •Pension qualifying earnings method •Basic pay method •Total earnings method |
What does pension qualifying earnings mean?
In the UK, a pension qualifying earnings is the portion of your earnings that counts towards your workplace pension scheme. The portion set aside from the employee’s earnings is then used to calculate the employee’s pension contributions.
The earnings threshold for auto-enrolment in a workplace pension
To qualify for auto-enrolment in a workplace pension scheme, you must be between the age of 22 and the state pension age. As of 2022, the state pension age is 66 (due to be upgraded to 67 between 2026 and 2028). You must also earn a minimum of £10,000 per annum.
There are various ways to calculate pension earnings. Pension qualifying earnings is one method employers use to determine an employee’s pensionable earnings.
Qualifying earnings pension calculator
If you are unsure about calculating your workplace pension qualifying earnings, don’t worry, help is at hand. You can use a qualifying earnings pension calculator, which is a tool that helps you calculate how much you or your employer must contribute to your workplace pension based on your earnings.
You need the following information to use a qualifying earnings pension calculator, your gross earning, the qualifying earnings band, and the contribution rate.
You can use this online workplace pension contribution calculator, but always check the information stated above, as the yearly pension contribution rates and qualifying earnings bands may change.
There are various ways to calculate pension earnings.
Ways of calculating pensionable earnings in 2023
You now know that the minimum you must contribute to your workplace pension is 5% of your pay. But what does “pay” mean? You need to know your pensionable earnings.
The calculation of pensionable earnings in the UK can vary depending on the type of pension scheme you are enrolled in and the type of method your employer uses for calculating pensionable earnings.
There are several ways to calculate pensionable earnings in 2023, including:
Qualifying earnings pension method
The qualifying earnings band is a slice of your salary set by the UK government. The earnings thresholds for the current 2023/23 tax year are set, starting at £6,240 per annum, and the upper earnings limit is £50,270 per annum.
As stated above, the minimum level for auto enrolment qualifying earnings is £10,000 to ensure low to moderate earners can save and benefit from a workplace pension.
This range includes all aspects of your salary, including commission, bonuses, et cetera. The qualifying earnings pension method is usually used in defined benefit schemes. However, it is also used in some defined contribution schemes.
The pension qualifying earnings for 2023/2024 have already been decided, and they are the same as the qualifying earnings for pension 2022/23.
The basic pay method
This method is the one most commonly used for defined contribution schemes. With this method, a percentage of your pension contributions is used to calculate your pensionable earnings. It uses your basic salary before any commission, bonuses or overtime is added.
The total earnings method
Rather than just taking basic pay into account (as defined above), the total earnings method takes into account the basic salary plus any commissions, bonuses and overtime. The only thing it doesn’t include is any income from dividends.
Let’s now look at some practical examples of the difference in action.
- The Pension Qualifying Earnings method – Take the upper earning threshold of £50,270, and deduct the lower starting threshold amount of £6,240, leaving an amount of £44,030. Your employer contributes £1,320 (that being 3% of £44,030), while you contribute £2,205 (that being 5% of £43,760).
- The Basic Pay method – A simple calculation of the relevant percentages. So, if you earn £30,000, your employer contributes £900 (3% of £30,000), and you contribute £1,500 (5% of £30,000).
- The Total Earnings method – Another straightforward percentage calculation. If your total earnings are £50,270 per annum, your employer contribution is £1,500, while yours is £2,500.
To find out which particular method your employer uses to calculate your pension earnings, you can check any brochures or documents your employer may have given you regarding pension auto-enrolment qualifying earnings or ask them directly.
What happens if you’re below the qualifying earnings for automatic enrolment?
If your wages or salary happen to fall below the £10,000 for auto-enrolment, you can still tell your employer that you would like them to arrange for you to join a type of pension scheme. It is their legal duty to oblige you.
What happens if you’re above the qualifying earnings for automatic enrolment?
If you are fortunate enough to be above the top end of the earnings threshold, you are still entitled to be auto-enrolled in a workplace pension. But not all of your earnings will qualify as pensionable if you exceed the qualifying earnings threshold.
So, for example, if you are earning £55,000 per annum, your qualifying earnings will be capped at £43,760 (the maximum threshold of £50,000 minus the minimum £6,240).
Qualifying Earnings versus Pensionable Earnings
The jargon used when talking about pensions, and in this instance, workplace pensions, can be pretty confusing. People are sometimes bamboozled by the difference between qualifying earnings and pensionable earnings.
The difference is that pensionable earnings are the slice of your wages that is used to calculate pension contributions. However, there are three ways of making this calculation, and qualifying earnings are one of those three ways, the others being the basic pay method or the total earnings method.
Don’t forget your state pension
Don’t forget you’ve also got your state pension. Whereas your employee’s pensionable earnings dictate your workplace pension contributions, your state pension relies on your NI contributions. Therefore, you must accumulate 35 years’ worth of NI contributions to receive the maximum state pension.
Unfortunately, you can’t transfer your state pension – a topic we will discuss next.
The importance of having a good pension scheme
Knowing how to calculate your qualifying earnings for a pension in the workplace may be the beginning of a voyage of discovery into your overall pension scheme status.
If you’ve been employed for a number of years, during which time you’ve had several employers, you could end up with several different workplace pensions.
Here at Moneyfarm, we can help you with your pension transfer. It makes sense to have your pensions in one place for easier management.
Why not make the UK 2023 Tax Year your year for getting your pensions’ house in order?
Our pension experts at Moneyfarm can help you with anything you need to know about pensions – what your annual pension allowance is and how to keep within your pension lifetime allowance. So why not visit our website today?
FAQ
What is included in a workplace qualifying earnings calculation?
The following are included in the calculation of pension qualifying earnings, gross salary or wages, overtime, bonuses, commission, statutory sick pay, holiday pay and much more.
What are the three methods of calculating pensionable earnings?
The three ways of calculating pensionable earnings are basic pay, qualifying, and total earnings.
How are minimum contributions worked out?
4% pension contribution comes from the employee while the employer contributes 3% towards the employee’s pension.
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