Pension qualifying earnings UK: pensionable earnings and how to calculate them?

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%.

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 what an employee’s pensionable earnings should be.

Calculating how much you contribute to your workplace pension

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 what your pensionable earnings are, which can vary depending on which type of method your employer uses for calculating pensionable earnings.

The different ways of calculating pensionable earnings?

One way of calculating pensionable earnings is via pension qualifying earnings.

Pension Qualifying Earnings 2021/2022

The qualifying earnings 2021/2022 band is a slice of your salary set by the UK government. The earnings thresholds for the current tax year are set, starting at £6,240 per annum and reaching an upper limit of £50,270 per annum.

This range includes all aspects of your salary, including commission, bonuses, et cetera. This is the method usually used in defined benefit schemes. However, it is also used in some defined contribution schemes.

The pension qualifying earnings for 2022/2023 have already been decided, and they are the same as the qualifying earnings for pension 2021/22.

Two other methods can be used to determine pensionable earnings.

The basic pay method

This method is the one most commonly used for defined contribution schemes. It uses your basic salary before any commission 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 and bonuses. 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 be 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 earnings if you are above 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.

Qualifying earnings pension calculator

If you are unsure about calculating your workplace pension qualifying earnings, don’t worry, help is at hand. You can visit the Moneyhelper.org website (an independent organisation sponsored by the HM government) and use their online workplace pension contribution calculator.

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, to receive the maximum state pension, you must accumulate 35 years’ worth of NI contributions.

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 worker’s pensionable earnings calculations?
The following are included in the calculation of pensionable earnings, 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 via basic pay, qualifying earnings and total earnings method.

How minimum contributions are worked out?
4% pension contribution comes from the employee while the employer contributes 3% towards the employees’ pension.