Pensionable earnings – What’s included and how to calculate

Last checked and updated on 21 June 2022

In the UK, employers are responsible for calculating pensionable earnings for their employees. This can seem like a daunting task, but it’s actually quite simple once you know what to include and how to calculate it.

In this guide, we will walk you through everything you need to know about pensionable earnings. We’ll explain what is included and give you a step-by-step guide on how to calculate it yourself.

Plus, we’ll answer some common questions, such as whether bonuses are included and what happens if an employee changes jobs.

What are pensionable earnings?

Pensionable earnings are simply the total amount of an employee’s salary that is eligible to be contributed to their pension. This includes things like basic salary, overtime pay, and commissions. It often does not include things like bonuses, expenses, or benefits in kind, but this depends on the type of calculation used.

What is the pensionable earnings figure used for?
The figure is used to calculate how much an employer and employee will contribute to the employee’s pension. The amount of money that each person contributes is based on a percentage of the total pensionable earnings.

Pensionable earnings and pension schemes

In the UK, there are two main types of pension schemes used for auto enrolment: defined benefit and defined contribution.

Under a defined benefit scheme, an employee’s pension is based on their salary and length of service. The amount that they receive each year is calculated using a set formula.

Under a defined contribution scheme, both the employer and the employee make regular contributions to the employee’s pension pot. The final amount that the employee receives will depend on how much has been contributed and how well the investments have performed.

Pensionable earnings are used to calculate both types of scheme.

Methods for deciding rates for pensionable earnings

There are two common ways to determine a pension contribution rate based on these earnings: banded and accrued.

Banded calculation: This is the most common way to calculate pensionable earnings. It involves dividing an employee’s salary into bands, with each band having a different percentage rate.

Accrued calculation: This is a less common way to calculate and is usually only used if an employee has been with the same employer for a long time. It involves taking the employee’s salary and multiplying it by the number of years they have been with the company.

How to calculate pensionable earnings

To calculate an employee’s earnings, you will need to look at their payslip and add up all of the relevant earnings. Once you have this figure, you can then calculate how much you need to contribute to their pension.

3 types of calculation: basic pay, qualifying pay, and total earnings

There are three different types of calculation that you can use to calculate an employee’s earnings: basic pay, qualifying pay, and total earnings.

Basic pay is the most straightforward calculation and simply includes an employee’s regular salary or wages. This does not include any overtime pay, commissions, or bonuses.

Qualifying pay is a slightly more complex calculation and includes an employee’s regular salary or wages, as well as any overtime pay, commissions, and bonuses.

The current qualifying earnings range is £6,240 to £50,270, and it includes all sorts of income, including bonuses. This calculation is most often used in defined benefit pension schemes.

Total earnings is the most comprehensive calculation and includes an employee’s regular salary or wages, as well as any overtime pay, commissions, bonuses, and expenses.

Examples of pensionable pay calculations

To help you understand how these calculations work in practice, we’ve provided some examples below.

Type of calculationExample
Basic payIf an employee has a regular salary of £2000 per month, their basic pensionable pay would be £2000.
Qualifying payIf an employee has a regular salary of £2000 per month and they also receive a £500 bonus, their qualifying pensionable pay would be £2500.
Total earningsIf an employee has a regular salary of £2000 per month, they receive a £500 bonus, and they have £100 in commission, their total pensionable pay would be £2600.

Are bonuses included in pensionable earnings?

This is a common question that employers have. The answer is that it depends on the type of bonus. If the bonus is paid as part of an employee’s regular salary or wages, then it will usually be included in their earnings. However, if the bonus is paid as a one-time payment, then it will not be included.

What happens if an employee changes jobs?

If an employee changes jobs, their new employer will need to calculate their pensionable earnings from scratch. This is because the amount of an employee’s salary that is eligible for pension contributions can vary from job to job.

For example, an employee’s overtime pay may not be pensionable in their new job. As such, it is important to always check with an employee’s new employer to find out how their pensionable earnings will be calculated.

Closing words

Pensionable earnings are an important part of ensuring that your employees receive the full amount of pension benefits that they’re entitled to. We hope that this guide has been helpful in explaining what’s included in and how to calculate it.

Frequently asked questions

Below, we’ve provided answers to some of the most frequently asked questions.

Is commission included in pensionable earnings?

Yes, commission is usually included in an employee’s qualifying pay.

Do expenses count as pensionable earnings?

No, expenses are not considered to be pensionable earnings.

What is the qualifying earnings range?

The qualifying earnings range is the amount of an employee’s salary that is eligible for pension contributions. The current qualifying earnings range is £6,240 to £50,270.

Do I need to calculate my employees’ pensionable earnings?

Yes, as an employer, you are responsible for calculating your employees’ pensionable earnings. This is so that you can make the correct pension contributions on their behalf.

I’m self-employed, do I need to calculate my pensionable earnings?

No, if you’re self-employed, you don’t need to calculate your pensionable earnings. This is because you’re not eligible to receive a pension from your employer.

I’m retired, do I need to calculate my pensionable earnings?

No, if you’re retired, you don’t need to calculate your pensionable earnings. This is because you’re not eligible to receive a pension from your employer.

What is the difference between total pay and pensionable pay?

Total pay is the amount of an employee’s salary that is eligible for pension contributions, including any other earnings, such as overtime pay or commissions. Pensionable pay is the amount of an employee’s salary that is eligible for pension contributions.

I’m a director of a company, do I need to calculate my employees’ pensionable earnings?

Yes, as a director of a company, you are responsible for calculating your employees’ pensionable earnings. This is so that you can make the correct pension contributions on their behalf.

What is the difference between qualifying pay and total pay?

Qualifying pay is the amount of an employee’s salary that is eligible for pension contributions. Total pay is the amount of an employee’s salary that is eligible for pension contributions, including any other earnings, such as overtime pay or commissions.

What happens if I don’t calculate my employees’ pensionable earnings?

If you don’t calculate your employees’ earnings, you may not be making the correct pension contributions on their behalf. This could result in your employees not receiving the full amount of pension benefits that they’re entitled to.

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Important – The information provided in our articles is intended to be for general purpose use only, and not advice for you or your business. We strive to publish accurate information, but encourage you to fact-check and seek expert guidance. We recommend that you always speak to a qualified professional to get advice about how to operate your business under your specific requirements and circumstances.