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Pensionable Earnings

Learn about the different types of pensionable earnings

Understanding Pensionable Earnings: Types and Definitions

Pensionable earnings are the portion of an employee's pay that is used to calculate pension contributions. Employers must determine pensionable earnings to calculate both employee and employer contributions to workplace pension schemes. Below, we explore different types of pensionable earnings and provide new examples to illustrate how contributions are calculated.

What Are Pensionable Earnings?

Pensionable earnings refer to the portion of an employee's pay used to calculate pension contributions. These earnings can either be based on gross qualifying earnings (total pay before deductions) or banded earnings (after applying salary thresholds). Additionally, self-certification schemes may have customised methods for determining pensionable earnings.

Types of Pensionable Earnings

1. Unbanded Earnings (Gross Qualifying Earnings)

Unbanded earnings, also known as gross qualifying earnings (GQE), are the total pay an employee receives before any deductions. This includes:

  • Salary

  • Overtime

  • Commission

  • Bonuses

  • Statutory Sick Pay (SSP)

  • Statutory Maternity Pay (SMP)

Items such as expenses or travel reimbursements are not included in the pensionable earnings calculation.

  • Example Calculation for Unbanded Earnings:
    Sophie earns £2,300 per month in salary, plus £200 in overtime, making her total gross pay £2,500. Since her pension scheme uses unbanded earnings, £2,500 is the total pensionable earnings. Both Sophie and her employer will make contributions based on this amount. Sophie’s employer and employee contributions will be calculated on £2,500 for the month.

2. Banded Earnings

Banded earnings are earnings that fall between specific salary thresholds, which for the current tax year are:

  • £6,240 (lower threshold)

  • £50,270 (upper threshold)

With banded earnings, only the portion of the employee's pay that falls within this range is used for pension contributions. Earnings below the lower threshold or above the upper threshold are not considered pensionable.

  • Example Calculation for Banded Earnings:
    Dave earns £2,100 a month. Since his salary is below the upper threshold of £50,270, Dave’s pensionable earnings are calculated by subtracting the £6,240 lower threshold from his total earnings, resulting in £1,860 as his pensionable earnings. Contributions will be calculated based on £1,860 for the month.

Advanced Options for Pensionable Earnings

Employers can also choose to use more advanced options for calculating pensionable earnings, depending on the pension scheme type. Below are some alternative methods:

1. Basic Pay

Basic pay includes only the core salary and excludes bonuses, overtime, and commission.

  • Example:
    Megan has a salary of £2,400 per month. Her employer uses basic pay to calculate pension contributions. As a result, Megan’s pensionable earnings for the month are £2,400, and contributions will be based on this figure.

2. Calculate Contributions on At Least 85% of Total Pay

This option ensures that at least 85% of an employee’s total pay is pensionable. The 85% calculation applies to an employee’s full earnings, including base salary and additional pay.

  • Example:
    Alice has total pay of £3,000, which includes her £2,500 salary plus £500 in bonuses. Under the 85% rule, only 85% of her total pay is considered for pension contributions, so her pensionable earnings are £2,550 (85% of £3,000). Contributions are then calculated based on £2,550.

3. Calculate Contributions on Total Pay

This method uses total pay (including salary, bonuses, overtime, and commission) as pensionable earnings without any adjustments or thresholds. Employers must calculate contributions based on the employee’s entire pay package.

  • Example:
    Liam earns £2,700 in salary, plus an additional £400 in commission and £100 in overtime, for a total of £3,200 in monthly pay. Since his employer uses the total pay method, Liam’s pensionable earnings are £3,200 for the month. Contributions will be based on this full amount.

Which Option Should You Choose?

Choosing the appropriate method for calculating pensionable earnings depends on your pension scheme rules and what best suits your payroll system. Most employers choose unbanded or banded earnings to align with government pension thresholds, but some may opt for advanced options based on the complexity of their payroll systems or self-certification rules.

Final Notes

  • This guide is for informational purposes only and should help you understand the basics of pensionable earnings.

  • Note: The figures provided (such as salary thresholds) are based on the 2024-2025 tax year and may change over time. Stay updated with any changes to pensionable earnings and thresholds, which may affect your contributions.

By correctly understanding and applying the appropriate type of pensionable earnings, you can ensure accurate pension contributions and compliance with the relevant pension laws.